Energy: Nuclear Fusion
	 — 
	Question

Viscount Montgomery of Alamein: To ask Her Majesty's Government whether they will support further investment in the development of nuclear fusion.

Lord Young of Norwood Green: My Lords, the UK invests in nuclear fusion research through the Engineering and Physical Sciences Research Council, the EPSRC. Almost all UK fusion research takes place at the United Kingdom Atomic Energy Authority at Culham, which will receive grant support from the EPSRC of £106 million over the four years culminating in 2009-10. The UK also participates in the EURATOM European fusion programme and the ITER project—the international thermonuclear energy reactor project—through its contribution to the EU budget.

Viscount Montgomery of Alamein: My Lords, that is a helpful reply as far as it goes. Will the Minister guarantee that there will be sufficient financial support after 2010 to ensure continuity of the Joint European Torus project at Culham until such time as the larger, commercial-scale facility in the south of France, which is being developed by a global consortium, comes on stream?

Lord Young of Norwood Green: My Lords, we can guarantee that continuing collaboration. ITER is a globally publicly funded scientific collaboration on nuclear fusion. It involves the EU, China, India, Japan, Russia, Korea and the United States and is being constructed at Cadarache in the south of France, to which the noble Viscount referred. The ITER agreement was signed by the seven parties in November 2006. We strongly support ITER as the next step towards practical fusion power. It could lead to the demonstration of full-scale power generation in a prototype power plant in 30 to 35 years. This is a long-term project, which has the potential for a long-term secure source of energy. The funding will be through the EURATOM agreement and it will continue.

Lord Jenkin of Roding: My Lords, although that is a welcome assurance from the Minister, does he recognise that the Joint European Torus at Culham, to which he referred, is the biggest tokamak in the world and that there is huge expertise from British scientists and engineers? Will he give an assurance that the ITER project, to which he also referred, is taking full advantage of this pool of British expertise and knowledge, notwithstanding that the project is situated at Cadarache in France?

Lord Young of Norwood Green: My Lords, I can confirm that we undertake the vast majority of fusion research in the UK and maintain the Joint European Torus as a fusion facility for European scientists. I agree with the noble Lord about the importance of the contribution that we make to this project.

Lord Taverne: My Lords, do the Government agree that real progress has been made at Culham in solving some of the scientific problems and that there are good prospects that in due course there will also be a practicable solution to the engineering and materials problems? As fusion in the medium term is possibly the best hope for the world's serious energy problems, and as greater investment could speed up the project, can the Government give it a higher priority than seems to be indicated by the Minister's answer?

Lord Young of Norwood Green: My Lords, I must confess that I am not an expert in nuclear physics, as has probably been obvious from my replies, but we have a long-term commitment to the ITER project. It could lead to a demonstration of full-scale power generation in a prototype power plant in 30 to 35 years. It certainly requires an act of faith but the leading physicists in this area believe that it is possible and capable and we are fully committed to this international project. We should not underestimate the significance of a project that combines the EU, China, India, Japan, Russia, Korea and the United States. I cannot confirm whether we will give any more to it but I am happy to write to the noble Lord on the matter.

Lord Broers: My Lords, can the Minister reassure the House that he realises the priority that is given to this project internationally? Last year I was a member of a committee put together by the US National Academy of Engineering and charged with looking at the grand challenges for engineering in the coming century. We identified 50 initially but boiled them down to 14. The projects related to energy, infrastructure and even medicine. Fusion survived through to the final 14 and engineers give the project an extremely high priority internationally. We have a very strong position, which I hope the Minister will sustain.

Lord Young of Norwood Green: My Lords, according to the information with which I am supplied, we are fully committed to this project. I agree with the noble Lord about its significance and the importance of a long-term commitment.

Lord Winston: My Lords, given that my noble friend has pointed out that the chance of nuclear fusion promoting valuable power to our energy needs is some 30 to 35 years off, can he reassure the House that there will be continued investment in the improvement of nuclear fission technology as well? This is a serious issue at present.

Lord Young of Norwood Green: My Lords, my noble friend is right. We believe in a balanced and integrated approach to energy and not in putting all our eggs into one basket. The Government have demonstrated their commitment to all forms of renewable energy, including nuclear.

Lord Stoddart of Swindon: My Lords, is the Minister aware of the interesting developments in the United States with laser fusion technology? Will the Government examine that? As it will be, apparently, 35 years before we get fusion power, has the Minister noticed the report in today's paper that it will provide each gigawatt of electricity much cheaper than that produced by wind power?

Lord Young of Norwood Green: My Lords, these statistics are always complicated. It would be best if we wrote to the noble Lord on laser energy.

Legislation: Lord Chancellor
	 — 
	Question

Lord Campbell of Alloway: To ask Her Majesty's Government what the role of the Lord Chancellor is in tendering advice to the Cabinet and to a Secretary of State about the presentation of Bills to Parliament.

Lord Campbell of Alloway: My Lords, I beg leave to ask the Question standing in my name on the Order Paper, having declared my interest on the fourth day of the debate on the humble Address.

Lord Bach: My Lords, the Lord Chancellor is a member of the Legislation Committee, which considers all Bills before they are introduced into Parliament.

Lord Campbell of Alloway: My Lords, why has it been sought to foreclose on the role of the Lord Chancellor to tender his advice, which has been established and retained by usage and which has not been abrogated by statute, by setting up a combined appointment with conflicting functions which has presented the constitutional renewal Bill to Parliament? Would any Lord Chancellor exercising that role have withdrawn or substantially amended that Bill before presentation to Parliament, as advised in the report of the committee?

Lord Bach: My Lords, changes to the process for approval of legislation for introduction into Parliament long pre-dated the reforms of the office of Lord Chancellor in 2005, let alone the creation of the Ministry of Justice in 2007. The usage and custom to which the noble Lord refers have already moved on and, arguably, have fallen into abeyance. As has been pointed out in this House fairly recently, the Lord Chancellor's functions in relation to the rule of law are now on a statutory basis. The Lord Chancellor himself remains a member of the Legislation Committee which approves legislation before its introduction and, therefore, has the opportunity to raise any concerns he may have at that stage.

Lord Tyler: My Lords, does the Minister recall that the noble Lord, Lord Campbell of Alloway, and I, other Members of the House and MPs sat on the Joint Committee for many months examining a draft constitutional renewal Bill. What has become of that Bill? We could be discussing this issue if we were now debating that Bill. What has become of the Prime Minister's programme for the governance of Britain, which he announced at the very beginning of his premiership when he wanted to do all sorts of good things to improve the accountability of both Houses of Parliament? Does the Minister not recognise that this is not a luxury that we can leave until the end of the recession? It is urgent. The public are losing confidence in both Houses of Parliament, and the events of the past few days have not helped the reputation of Parliament generally and of this House in particular.

Lord Bach: My Lords, I ask the noble Lord to be patient. We plan to introduce a constitutional renewal Bill as soon as parliamentary time allows. We expect that to be later this Session. We remain committed to the programme of constitutional renewal, which we announced in the Green Paper. As part of that programme we issued a draft constitutional renewal Bill for consultation and we are looking at the final composition of that Bill. I pay tribute to the noble Lord and to other Members of the House who served on the Joint Committee.

Lord Mayhew of Twysden: My Lords, will the Minister deal with the point arising from my noble friend's Question; namely, that it was the independent political status and professional reputation of the Lord Chancellor, before that office was reformed, that enabled his advice on the constitutional significance of any Bill brought forward for approval in Cabinet to be almost universally accepted? Now that that safeguard has been dismantled—to use polite language—are we not already seeing some unfortunate results?

Lord Bach: My Lords, I do not agree with the noble and learned Lord that the safeguard has somehow been dismantled. The Lord Chancellor now has a constitutional duty in relation to the independence of the judiciary and the rule of law and, as an important member of what is commonly known as the L Committee, he has an important role to play in looking at whether Bills conform with the various treaties and other obligations which the UK Government have. I remind the House that all Ministers, not just the Lord Chancellor, are required to respect the independence of the judiciary and the rule of law at all times.

Agriculture: Hill Farm Allowance
	 — 
	Question

Baroness Byford: To ask Her Majesty's Government how many farmers are affected by the overpayment of the hill farm allowance in 2006; and what is the scale of that overpayment.

Lord Hunt of Kings Heath: My Lords, final figures for 2006 will not be known until work to confirm the existence and level of debt has been completed. However, it is expected that the exercise will affect between 1,000 and 2,000 farmers, with an overpayment value of between £1 million and £2 million.

Baroness Byford: My Lords, that really is a very unsatisfactory position. I am sure that the Minister will agree that the RPA payments system is appalling and its continuing incompetence is unacceptable. Has the RPA sent out letters to all farmers who were overpaid, and what information was given to those farmers about what overpayments were due?

Lord Hunt of Kings Heath: My Lords, the noble Baroness is aware of the problems that the RPA has had, which led in the first place to what might be described as interim payments being made in relation to the hill farm allowance. Work is still being undertaken. I understand that stakeholders were notified last November that the overpayment process would begin. Work is now being undertaken and I understand that it will be completed in the next two months. Letters are likely to be sent out in March.

Lord Taylor of Holbeach: My Lords, I declare an interest: I am still waiting for any of our single payments for the year ending March 2008 from the Rural Payments Agency. Overpayment is a different matter. Does the Minister think it is easy for hill farmers, the most disadvantaged sector, to meet an unexpected demand to pay within 30 days? How does this compare with the treatment of other disastrous overpayments, such as those under the tax credit system?

Lord Hunt of Kings Heath: My Lords, I think the overall performance of the RPA was behind the noble Lord's first question; this House is well aware of the issues that have been faced in this area. On the SPS payments for 2008, 75 per cent, by value, of those payments should be made by the end of this month. I am aware of the pressures that hill farmers are under. I assure the House that repayments will be handled as sensitively as possible and that there will be a number of repayment options to make this as easy as possible for the hill farmers affected.

Lord Tyler: My Lords, can the Minister confirm that there will be a 30-day deadline for repayment of these sums? Is it not quite extraordinary that Defra has, on the one hand, presided over the failures of the RPA—the only outcome being that the Secretary of State, when a major failure took place, was promoted—while, on the other hand, it pursues farmers with these vigorous timescales?

Lord Hunt of Kings Heath: My Lords, there will be a range of repayment options. The figure can be repaid over six months. Indeed, if there are particular hardship issues, it is possible that the repayment period could be lengthened. The debt has to be of £250 and above. As I have said, I understand the pressure and stress that many hill farmers are under. That is why we will take as sensitive an approach as possible. We will work with the NFU and other stakeholders to ensure that we are aware of all the issues. At the end of the day, this money has to be recovered.

The Lord Bishop of Lincoln: My Lords, I am grateful for the Minister's assurance that every effort will be made to match the repayment schedules to the needs of the individual farmers, but is he aware that particular farmers will not be able to access the uphill entry level stewardship scheme and will therefore lose that source of income and be further afflicted? I declare an interest as a trustee of the ARC-Addington Fund and ask that every attempt be made to keep the farm help charities informed so that we can in our turn be supportive of those who are most deleteriously affected.

Lord Hunt of Kings Heath: My Lords, I thank the right reverend Prelate. I shall certainly ensure that my department is in touch with him and the relevant charities. I pay tribute to them for their work and for their support to farmers, particularly hill farmers, in what is a very difficult time.
	On the transition from hill farm allowance to uplands ELS, I understand a number of the concerns. We have been in close discussions with organisations such as the NFU. However, we expect that if under the new system which comes into being in 2010 there is an 80 per cent uptake, the amount of money in the pool will be about £25 million, which is a little more than is available now under the hill farm allowance, and that if the uptake is more than 80 per cent, more resources will be available.

Lord Elystan-Morgan: My Lords, does the Minister recollect the rule that money paid under a mistake of fact is normally recoverable at law, but that money paid under a mistake of law is not? Is it possible that some of these moneys were paid under a mistake of law rather than a mistake of fact?

Lord Hunt of Kings Heath: My Lords, as ever, the noble Lord asks a very good question. He, along with other noble Lords, will know that when the SPS and hill farm allowance payments were started to be made by the Rural Payments Agency, the system came under considerable pressure, the targets were not met, and there was great concern that farmers were not receiving the resources that they were due. In view of that, the decision was taken to make what are best described as partial or interim payments, but it was always on the understanding that those payments would have at some stage to be reconciled with the rules under which they were given, as has now happened.

Lord Hamilton of Epsom: My Lords, if these are relatively modest sums owed by some of our poorest farmers, why can they not be repaid merely by being deducted from next year's payments?

Lord Hunt of Kings Heath: My Lords, that is one of the options. The hill farm allowance payments are due to go out in March this year. One option is for hill farmers to decide that the repayment should be taken off that allowance. There are a number of repayment options. I can assure the House that we will continue to talk with those who represent the interests of hill farmers. We will ensure that the matter is handled as sensitively as possible.

Lord Tebbit: My Lords, is anyone to blame for this, and, if so, who?

Lord Hunt of Kings Heath: My Lords, the matter of the Rural Payments Agency has been inquired into thoroughly. Ministers have accepted their responsibility and apologised. As the Government said in response to the PAC's report, the Permanent Secretary and senior members of the department involved in oversight of the delivery of the programme share some responsibility for the failures, but the department's strong view is that accountability rests fundamentally with the then chief executive of the Rural Payments Agency. The organisation that he headed was responsible for delivery, and at no time did he say to the department that it was not possible to meet the objectives set.

Israel Defence Forces
	 — 
	Question

Lord Ahmed: To ask Her Majesty's Government whether any British citizens are serving in the Israeli Defence Force or the Israeli Defence Reserves.

Lord Malloch-Brown: My Lords, other than press reports, the UK Government do not possess information about whom the Israeli Government have called up to serve in the Israel Defence Forces or the Israeli Defence Reserves, including any dual nationals. Only the Israeli Government would have this information.

Lord Ahmed: My Lords, I thank my noble friend the Minister for his reply. He referred to the press reports in the Sun, the Daily Mirror and the Guardian that British citizens have been serving in Gaza. Is he aware that there is a lot of evidence from Amnesty International, UNRWA and many media reports that international law has been broken and war crimes committed in Gaza? Will he assure the House that if British citizens have been involved in breaking the fourth protocol of the Geneva Convention or committing war crimes, they will be prosecuted on their return? Will he also assure the House that no one will escape prosecution if they breach the fourth protocol of the Geneva Convention, as Major-General Doron Almog did in September 2005?

Lord Malloch-Brown: My Lords, I assure my noble friend that this House shares the concern that war crimes may have been committed. A number of investigations are now under way. The Human Rights Council last week established different mechanisms to investigate these allegations. We need to wait until these investigations are complete before we can decide what steps, if any, are necessary. I am not sure that it is right to distinguish between British nationals and others. Anybody who has broken the fourth protocol of the Geneva Convention deserves to meet justice in some court or another.

Baroness Tonge: My Lords, is the Minister aware, and is he not concerned, that every summer many Jewish school children from this country go to Israel for military and citizenship training by the Education and Youth Corps of the IDF?

Lord Malloch-Brown: My Lords, I was not aware of that, but those who are dual nationals and who carry Israeli passports—perfectly understandably, given the situation of Israel—do make a commitment to do national service. That is part of the requirement of Israeli citizenship. As to those who are solely UK nationals, it is very unlikely that any of them would have been serving in the recent operations.

Lord Janner of Braunstone: My Lords, in certain cases, Britain allows people of dual citizenship and even non-citizens to serve in our forces. Does my noble friend agree that, as Israel is a country with immigrants of many nationalities, it is inevitable that its defence forces will include people who retain the citizenship of their country of origin, including our own? Does he agree that we should be proud of our citizens who fought against the terrorist organisation bent on the destruction of a sovereign and democratic state?

Lord Malloch-Brown: My Lords, as so often with my noble friend, I was with him until half way through the question. There is a marked difference between the Israeli forces undertaking action against a terrorist organisation and action taken against another state. The Act that governs this is the Foreign Enlistment Act 1870, which makes it an offence for a British subject without licence from Her Majesty to enlist in the Armed Forces of a foreign state at war with another foreign state which is at peace with the UK. Clearly, that does not govern this situation. Regarding dual nationals, it has never been suggested that someone who also holds an Israeli passport should not meet the obligations of citizenship in that country, which include military service.

Lord Wallace of Saltaire: My Lords, do we not need to look again at the 1870 Act? In the light of the huge number of dual citizens in this country, including a great many from Pakistan, and the number of citizens from other Commonwealth countries—3,000 Fijians and 1,000 people from Caribbean countries serving in the British Armed Forces—perhaps we need to look at this sensitive area again.

Lord Malloch-Brown: My Lords, the noble Lord is correct. This has raised important issues, and we need to look at them.

Arrangement of Business
	 — 
	Announcement

Baroness Hayman: My Lords, the House will be aware that I have allowed a Private Notice Question by the noble Lord, Lord Strathclyde, to the Leader of the House on recent allegations concerning certain Members of the House. It may be helpful for noble Lords to know that two Private Notice Questions on these issues were submitted, one by the noble Lord, Lord Strathclyde, and one by the noble Lord, Lord Goodhart. After discussion with the parties concerned, I would suggest that it might be convenient for the House if the supplementary question from the noble Lord, Lord Strathclyde, were followed immediately by a supplementary question from the noble Lord, Lord Goodhart. The Leader of the House could then reply to both supplementary questions before questions from other noble Lords.

Lord Bassam of Brighton: My Lords, further to the remarks by the Lord Speaker, I suspect that a number of noble Lords will wish to ask questions to my noble friend the Lord President because of the special importance of this issue to the House. The Companion tells us that proceedings on a Private Notice Question are expected to take not more than 10 minutes. If at the end of this 10-minute period a significant number of noble Lords still wish to intervene, I suggest that we make a maximum of a further five minutes available on this occasion. I remind the House that proceedings on PNQs follow the rules for Oral Questions. Supplementary questions should be brief and confined to not more than two points.
	Separately, but also importantly, I alert the House to a change of the business advertised for tomorrow. The list of speakers for the important Gaza debate now stands at 40. As it is last business tomorrow and may not start until perhaps 8 pm, or perhaps even 9 pm, we have decided that it is better to allow a crucial debate more time rather than squeeze Back-Bench contributions or sit well into the early hours. The earliest opportunity for us to reschedule the debate is next Friday 6 February, which had been planned to be a non-sitting day.

House of Lords: Conduct of Members
	 — 
	Private Notice Question

Tabled By Lord Strathclyde
	To ask the Leader of the House what action she will take to uphold the reputation and the standards of the House in response to the allegations against Members of the House contained in the Sunday Times on 25 January 2009.

Lord Strathclyde: My Lords, I beg leave to ask a Question of which I have given private notice.

Baroness Royall of Blaisdon: My Lords, a number of allegations were published yesterday in relation to Members of this House. I am deeply concerned about these allegations, and this concern is shared across the House and beyond. Since then, I have referred these allegations to the Sub-Committee on Lords' Interests. The chair of the committee, the noble Baroness, Lady Prashar, has agreed to expedite the investigation into these allegations. Indeed, the committee has already met, and investigations are under way.
	I have separately asked the chairman of the Committee for Privileges, the Chairman of Committees the noble Lord, Lord Brabazon of Tara, to consider any issues relating to the rules of the House that arise, especially in connection with consultancy arrangements, and in connection with sanctions in the event that a complaint against a Member is upheld.
	I am also seeing personally each of the Members concerned.

Lord Strathclyde: My Lords, this is a deeply shocking and depressing moment. This House has been mired in a grim torrent of criticism about a culture of sleaze. Does the Leader of the House agree that, if these allegations are true, those involved have shamed this House and must comply with whatever action the House asks of them, including taking a period of absence?
	There are no grey areas in the paid advocacy rule. The code says:
	"Members of the House ... must never accept any financial inducement ... for exercising parliamentary influence",
	and goes on to say that Members,
	"must not ... promote any matter, in return for payment".
	It could not be clearer.
	The inquiry that the noble Baroness has announced must be rigorous and swift, so we can find out what happened as soon as possible. Will she confirm that any noble Lord involved in these allegations need not wait for the results of the inquiry to come to the House to make a Personal Statement and accept responsibility for any misjudgment or wrongdoing? If the stories are true, would they not be well advised to do so?

Lord Goodhart: My Lords, I was a member of the Committee on Standards in Public Life at the time of our report in 2000 on the standards of conduct in the House of Lords. The committee accepted the views of a number of prominent Members of your Lordships' House, including the noble Lord, Lord Strathclyde, and the leaders in this House of my party and of the Labour Party, that naming and shaming by a report of the Committee for Privileges was an adequate sanction. Does the Leader of the House agree that the committee got it wrong and that we should have recommended tougher sanctions? Does she also agree that to restore the standing of your Lordships' House we need to adopt and apply further sanctions for future breaches of rules of conduct, including suspension and possibly, in extreme cases, even expulsion from your Lordships' House?

Baroness Royall of Blaisdon: My Lords, the allegations are indeed deeply shocking; but they are, at this moment in time, allegations. This is damaging not only to this House but also to Parliament and to politics itself. We in this House have a responsibility to adhere to high standards, and we have to ensure that we adhere to those high standards in order to ensure that there is trust in the whole of our parliamentary process. I am pleased, as I said, to know that a rigorous and swift enquiry is already under way, and I am sure that the committee will deliberate on these issues as soon as it can. As for Personal Statements, that is a matter for the individuals concerned. The noble Lord, Lord Goodhart, mentioned sanctions. I wholeheartedly agree that tougher sanctions are necessary. That is precisely why I have written to the chairman of the Committee for Privileges asking him to review these matters. I am confident that that will be taken forward swiftly also.

Baroness D'Souza: My Lords, this Chamber has undoubtedly become more professional and more effective in the past decade or so, and that necessarily calls for greater accountability in governance and in regulation. Does the Leader of the House agree that a full programme of measures, with specific attention to sanctions, should now be drawn up and implemented very shortly?

Baroness Royall of Blaisdon: Yes, my Lords, I believe that all the rules pertaining to the complaints procedure, and indeed the issue of sanctions, need to be looked at. I am confident that that is what the chairman of the Committee for Privileges will do.

Lord Snape: My Lords, as one of those involved in this incident, may I first apologise to your Lordships for bringing this House—if I have done so—into disrepute? However, these are allegations in a Sunday newspaper. I appeal to noble Lords in all parts of the House to allow me the opportunity to refute those allegations before your Lordships' House and elsewhere.

Lord Taylor of Blackburn: My Lords, I reiterate what has been said—

Lord Hunt of Kings Heath: My Lords, I wonder if we could just allow the Leader to respond to each question.

Baroness Royall of Blaisdon: My Lords, I am grateful for my noble friend's intervention and note what he says.

Lord Taylor of Blackburn: My Lords, as one of those named in this article which alleges that I have committed an error, I most humbly apologise if I have done anything that has brought this House into disrepute. However, as my noble friend said, a committee of inquiry will take place. I would love to give evidence before that committee. I feel within my own conscience that I have followed the rules and the directions given in this House over the 31 years that I have been a Member.

Baroness Royall of Blaisdon: My Lords, I note the comments made by my noble friend. I know that the committee will undertake its procedure swiftly and justly.

Lord Wallace of Saltaire: My Lords, will the committee as set up have power to subpoena witnesses if necessary? If we are to have a really thorough enquiry, we need to make sure that we can establish the underlying issues at stake.

Baroness Royall of Blaisdon: My Lords, I do not know whether the committee can subpoena witnesses but it can invite witnesses to appear before it.

Lord Harris of Haringey: My Lords, is my noble friend aware that although I was not named in yesterday's articles in the Sunday Times, I was approached by the undercover journalists in question? I hope she is aware that this morning I therefore wrote to the noble Baroness, Lady Prashar, to say that I feel it would be appropriate to give evidence to any inquiry which the sub-committee might conduct. I am confident that I did not breach any of the House's rules, nor did I offer to do so, but I nevertheless think that it is important—as I was the subject of the journalists' deception and attempted entrapment—that I be given the opportunity to be questioned by the sub-committee.

Baroness Royall of Blaisdon: My Lords, I was aware of the letter from my noble friend. I am sure that the whole House will welcome the action that he has taken.

Lord Lester of Herne Hill: My Lords, the noble Lord, Lord Strathclyde, has rightly said that the rules about paid advocacy could not be clearer. I wonder whether the Leader of the House can confirm—I am speaking not about this case but in general—that it is as bad for a Peer, for reward, to get another Peer to exercise influence over legislation as it is for the Peer him or herself to do so?

Baroness Royall of Blaisdon: My Lords, the noble Lord is absolutely correct. It would be absolutely against the rules of this House, and against any standards that we uphold, for a Peer to ask one of his or her fellow Peers to act in a way which is against the rules of this House.

Baroness Amos: My Lords, has the committee been asked to review the code of conduct in its entirety? It is very important that our rules are absolutely crystal clear. I also commend my noble friend for acting so swiftly, and agree with those who have said that it is important that we await the outcome of any review.

Baroness Royall of Blaisdon: My Lords, I am grateful for the comments from my noble friend. I have not asked the chairman of the Committee for Privileges to review the code of conduct in its entirety, but I will take up the issue. The views expressed in the House today have shown that that is what the House as a whole would wish to happen.

Lord Low of Dalston: My Lords, does the Minister agree that while it may be necessary to revisit and review the code of conduct, especially as it relates to paid advocacy, and possibly to tighten and clarify the rules, it is not possible to draw any conclusions from possible breaches of the code of conduct about the route by which Members may come into this House? These are separate issues and ought to be kept distinct.

Baroness Royall of Blaisdon: My Lords, I shall have to read carefully the question from the noble Lord, but I think that he is right.

Lord Campbell-Savours: My Lords, does not this whole affair—with so much bad publicity over the weekend being transmitted all over the world; regardless of whether the allegations are proven or unproven—indicate that some aspects of self-regulation simply do not work, with the result that the House is being brought into disrepute? Should we not now be considering adopting the Nolan approach, which arose after a major scandal in the House of Commons, and appoint a commissioner for standards and privileges, as in the Commons? Is not the price we are paying for self-regulation the fact that our procedures prevent the Speaker of this House from intervening from the chair to demand higher standards and action to protect the integrity of this House? We need a rethink on the powers of both the Speaker and the Committee for Privileges.

Baroness Royall of Blaisdon: My Lords, my noble friend is correct: the allegations and stories in the Sunday Times have in essence brought this House into disrepute in the whole of the world. We therefore have to take whatever actions are necessary to restore trust and confidence in this House. This is a good House. We have high standards and we have to ensure that they are properly adhered to. My noble friend has raised many other issues—wider issues which we have to take into consideration—but I do not believe that it would be proper for me to comment on them at this moment at the Dispatch Box.

Lord Richard: My Lords, is it not important that we should take this whole affair in stages? And is it not perfectly clear that first we have to establish the facts? Is it not also perfectly clear that what my noble friend has already announced are significant steps in the direction of establishing those facts? Therefore, does my noble friend agree that perhaps it is time to stop commenting on the basis of, "If these allegations are true, then so and so will happen", and that we should let these investigations proceed? I hope they will proceed quickly and I hope they will be thorough.

Baroness Royall of Blaisdon: My Lords, I wholeheartedly agree. The investigations are now in place. We have to let them run their course. I am confident that they will be rigorous and swift and then we will take whatever action is necessary.

Banking Bill
	 — 
	Committee (5th Day)

Clause 167: Contingency funding
	Amendment 158C not moved.
	Amendment 159
	 Moved by Baroness Noakes
	159: Clause 167, page 88, line 32, at end insert—
	"(da) arrangements for institutions that have permission under Part 4 of the Financial Services and Markets Act 2000 to carry out the regulated activity of accepting deposits (within the meaning of section 22 of that Act, taken with Schedule 2 and by order under section 22) but are not incorporated in, or formed under the law of, any part of the United Kingdom;"

Baroness Noakes: Amendment 159 seeks to extend the contingency funding arrangements to foreign branch banks. We discussed the position of branches of foreign banks in earlier amendments and I now come to their impact on the Financial Services Compensation Scheme.
	My amendment adds a paragraph to the list of matters which contingency funding regulations may cover, so that arrangements can be made for branches of foreign banks which are allowed to accept deposits in the UK to contribute. It is clear from the Icesave example that the Financial Services Compensation Scheme had an important role to play in making sure that UK depositors received a return of their funds, both in respect of the amounts which should have been paid by Icelandic authorities and the extra amounts that were paid.
	In another place the Minister was fond of defending various aspects of the Bill on the grounds of future-proofing it against problems that might arise. My amendments are not even future-proofing; they are simply dealing with situations that have already arisen and carrying those into the possible new contingency funding arrangements. If contingency funding is introduced—and we will debate that shortly—foreign banks which take deposits in the UK should be included within its scope. I beg to move.

Lord Davies of Oldham: Clause 167 provides for the creation of contingency funds for the Financial Services Compensation Scheme, and this amendment appears to be intended to ensure that contingency funds could be used to meet the expenses arising from the failure of deposit-taking firms which are incorporated outside the UK but have Part 4 permissions like UK banks. The amendment, however, would only cover banks incorporated outside the European economic area which establish branches in the UK. These banks need a Part 4 permission to open a branch here. EEA banks can establish branches here using a passport issued by the home state authorities under the relevant EC directive. They are still authorised persons but qualify for authorisation under Schedule 3 rather than by having a Part 4 permission.
	I assume, therefore, that the amendment is a desire to make clear that, if pre-funding were restricted to banks and building societies, as the noble Baroness has proposed, this would not mean just UK banks and building societies. The objective is helpful but the amendment is unnecessary.
	Foreign banks which have branches in the UK are authorised persons. Non-EEA banks must join the FSCS and contribute to its levies. European economic area banks which join the FSCS to top up the coverage for their depositors also have to make an appropriate contribution to any FSCS levies. Pre-funding, if it were introduced, would not change that, so the proposed addition to Clause 167 would be redundant. I therefore hope that the noble Baroness, moving what I hope is a probing amendment, will think that this is a satisfactory explanation and be prepared to withdraw it.

Baroness Noakes: I want to clarify a small point. The Minister said that pre-funding would not change "that", being that foreign banks had to pay an appropriate amount into the FSCS. Is it clear that the power set up by Clause 167 will ensure that foreign banks contribute to contingency funding, if there were any, not just in relation to the payments out at the other end? That is what my amendment is designed to probe.

Lord Davies of Oldham: The noble Baroness is asking me to stray down paths on the pre-funding position as a whole that I am not currently prepared to follow. I think, however, that I can reassure her on that point.

Baroness Noakes: I am mystified by the Minister's reply, but will not prolong this. I might take it up outside the Committee.
	Amendment 159 withdrawn.
	Amendment 159A
	 Moved by Baroness Noakes
	159A: Clause 167, page 88, line 35, leave out "and"

Baroness Noakes: I also speak to the related Amendment 159B, and have grouped a question on whether Clause 169 should stand part of the Bill with these amendments, for the convenience of the Committee. These are probing amendments about the investment of funds within the Financial Services Compensation Scheme. As I understand it, if contingency funding were introduced, the aim would be to amass between 1 and 2 per cent of deposits. In today's money that would amount to around £15 billion, which is a not inconsiderable sum.
	My Amendments 159A and 159B amend subsection (2)(f) of proposed new Section 214A of the Financial Services and Markets Act 2000, to be inserted by Clause 167. New paragraph (f) allows regulations to deal with how funds held in the compensation scheme are to be invested, and my amendments say that any such investment must not distort existing markets; that is, the Financial Services Compensation Scheme must not use its financial muscle to become dominant in any investment market. There are many investment markets in which even this sum of money would not be noticed, but that would not necessarily be the case for all potential investment homes for the money.
	I have linked these amendments to new Clause 169 because that clause allows contingency fund money to be invested in the National Loans Fund, as specifically referred to in new paragraph (f). In another place, the Minister said that this would in fact be the default option for contingency fund money. Will the Minister confirm whether that is the position? It seems to have both advantages and disadvantages. On the one hand, it is clearly inefficient for the FSCS to set up an investment management arm to manage contingency funds. If it did so, it may well run into the dangers posed by my Amendments 159A and 159B. On the other hand, however, the investment returns earned in the compensation scheme ought to be at least as good as the banks themselves would have got, otherwise that will in due course penalise the banks as they would have lost the opportunity to make their returns and they may have to put even more money into the compensation scheme at a later date.
	Will the Minister explain on what terms the Financial Services Compensation Scheme would expect to lend its money to the National Loans Fund? Subsection (2) of new Section 223A of the Financial Services and Markets Act 2000, inserted by Clause 169, allows the Treasury to set terms. What sorts of terms would be set? Would they be market returns? If they are lower than market returns, how can the Government justify setting up pre-funding, taking the money and sticking it in the NLF to the disadvantage of the banks?

Lord Davies of Oldham: I appreciate the concerns expressed by the noble Baroness but hope I am able to persuade her that Amendment 159A and Amendment 159B would be unnecessary. As I hope I made clear in my last response, we have no intention of introducing pre-funding. It is not the time for doing that. However, if pre-funding were introduced our intention is that the contingency funds would be invested in the National Loans Fund, as is provided for in this clause—in other words lent to the Government as if invested in gilt-edged securities.
	If pre-funding were introduced, the funds built up would obviously have to be invested somewhere until they were needed. Equally clearly, the funds would have to be invested in low-risk investments which could be turned into cash quickly and in all market conditions. The Government are the best source of such investments in sterling. The Financial Services Compensation Scheme could just buy gilt-edged securities but direct investment in the National Loans Fund is more efficient and removes the need for the FSCS to have to employ advisers and administrators to manage its investments—a point the noble Baroness acknowledged in her opening remarks.
	As the funds invested in the National Loans Fund will have been lent to the Government, they will replace Government borrowing from other sources. At the end of each day, the Exchequer must borrow from the money market or place funds on deposit with the money market, depending on the net position reached after balancing outflows to finance expenditure again. Any funds from the FSCS will represent an inflow. Arrangements will be put in place to minimise the impact of these flows and ensure there will be no distortion of money markets—the burden of one of the noble Baroness's anxieties.
	The purpose of new Section 214A(2)(f) is to enable the regulations to specify some of the detailed requirements for the investment with the National Loans Fund from the investor's point of view. New Section 223A(2) in Clause 169 allows the Treasury to agree terms and conditions with the FSCS from the borrower's point of view. The FSCS is an independent body so will have to contract with the Treasury like any other lender to the Government. We will need to be able to regulate both sides of the transaction but equally to keep both sides separate in our minds.
	There is no intention that new Section 214A(2)(f) would be used to require the FSCS to take a different approach from that I have just set out for the investment of contingency funds. If some new approach were proposed in future, parliamentary approval would certainly be required under the affirmative resolution procedure, and we could then build in any necessary safeguards to meet concerns about distortion at that stage. I hope the noble Baroness feels I have answered the main points she addressed when she moved the amendment and that she feels able to withdraw it.

Lord Higgins: Will these payments to the National Loans Fund be identifiable publicly? Will they receive rates of interest? In principle, at what rate of interest will they be paid?

Lord Davies of Oldham: They will be part of the government funds, which will attract a rate of interest. The noble Lord will recognise that we are concerned about the urgency with which these funds might be required. They could be needed at such short notice that there are difficulties about the nature of the investment. The intention is that the Treasury would borrow at the same rate as the markets—the gilts rate. The whole point of this investment is that is has to be risk-free and pretty short term or almost immediate in realisation. The noble Lord will recognise there are constraints about the nature of the funds concerned.

Lord Higgins: Is it possible for the public to identify that such a transaction has taken place and, again, is the rate of interest to be the overnight rate or the three-month rate?

Lord Davies of Oldham: As I indicated, because of the nature of the funds, they will be on a short-term rate. However, whether they can be identified is a difficult question to address. I am not sure that I have the answer to that and so shall have to write to noble Lords taking part in the Committee. Nevertheless, the noble Lord, Lord Higgins, will recognise the nature of these funds and the use to which they are meant to be put.

Lord Higgins: I may understand their nature but if one organisation makes a deposit with the other organisation, I am not clear whether there will be any public accountability to indicate that such a transaction has taken place. If the funds do attract interest, will that interest then be credited back to the organisation making the deposit?

Lord Davies of Oldham: On the second point, I can certainly reassure the noble Lord that that is the case. I merely sought to defend the fact that they would be secure short-term loans because of the nature of the funds and their potential use. On the question of whether they are identifiable, I am sorry that I cannot be more explicit but I just do not have the answer. I do not know what the nature of the accountability would be, given that these transactions can occur with some frequency, and therefore I shall need to write to the noble Lord with that detail.

Baroness Noakes: The Minister has, with the help of my noble friend Lord Higgins, clarified what we are talking about in terms of deposits in the NLF attracting a short-term rate or even an overnight rate. However, that is almost certainly the wrong rate. If you had £15 billion which needed to be realised quickly, you would not keep it in a place where it attracted an overnight deposit rate; if you had it in gilts, you could realise it very quickly. It seems that the Government are set on imposing an artificial rate on the FSCS, which in effect would then penalise the banks further for having put the money up-front into the FSCS by artificially reducing the rate. This may be very convenient as a means of funding this horrendous deficit that the Government are intent on inflicting on this country, but it is not the right approach to funding the FSCS, which has to be funded by the banks. I shall consider carefully what the Minister has said. I am grateful for his responses but I am less than clear that this is a satisfactory conclusion. However, for today, I beg leave to withdraw the amendment.
	Amendment 159A withdrawn.
	Amendment 159B not moved.
	Amendment 159C had been withdrawn from the Marshalled List.
	Amendment 159D not moved.
	Amendment 160
	 Moved by Baroness Noakes
	160: Clause 167, page 89, line 3, at end insert—
	"214AA Contingency funding: power to make regulations
	The Treasury may make regulations under section 214A only after it has laid before Parliament a report on the impact of a pre-funded scheme on the classes of person from whom contributions can be levied and whether contingency funding is the best way to achieve the special resolution regime objectives set out in section 4 of the Banking Act 2008.""

Baroness Noakes: I shall speak also to the Question whether Clause 167 shall stand part of the Bill, and I shall start with the clause itself. I hope that noble Lords will not have mistaken my earlier amendments, which were designed to improve Clause 167, as approval of the clause. We on these Benches have grave misgivings about pre-funding the Financial Services Compensation Scheme. We agree with the British Bankers' Association that the case has not been made for pre-funding. In the US, the Federal Deposit Insurance Corporation operates in a very different banking market, with many small regional banks for which failure is not an uncommon occurrence. Banking in the UK is very much more concentrated.
	The size of UK banks has an implication for the size of the contingency fund. If it were funded at around £15 billion, as I suggested in my earlier amendment and as I understand has been suggested by those who have been proposing contingency funding, that would not come anywhere near the amounts that would have been required, for example, to pay out Northern Rock's depositors, had that been necessary. A Barclays or an HSBC does not even bear thinking about in relation to contingency funding. If the contingency funding is perceived to be puny against the large banks, that will not do anything for confidence in the banking system. So we are perplexed as to why the Government have set upon this path.
	The regulatory impact assessment calculated the cost to the banks of between £100 million and £200 million, but the banks believe this to be a gross understatement. The amount is considerably below the real opportunity cost to them of retaining the funds within their businesses until they are needed. I do not believe that it is the right time to introduce legislation for pre-funding, and I do not believe that even the Government would claim that the issues have been fully thought through yet. I know that the Minister will say that it is only a power and that there will be consultation followed by an opportunity for Parliament to approve the detailed regulations, but he knows full well that the affirmative procedure falls far short of the scrutiny that a Bill receives. As an order is unamendable, Parliament has only the nuclear option of refusing to pass it.
	There cannot be a timing argument. It could never be the case that contingency funding was urgently required. If and when a case was properly made, the Government could take primary legislation in the ordinary way and argue their case to Parliament at that time.
	We have tabled Amendment 160 as an alternative to deleting Clause 167; it requires the Government to table a report before Parliament before any regulations under proposed new Section 214A of the Financial Services and Markets Act 2000 are laid. The report should deal with the impact on the persons who will be required to contribute and whether the contingency funding is the best way to achieve the special resolution regime objectives. That will allow Parliament to initiate a debate on the issues and not simply be presented with a government fait accompli in the form of a statutory instrument.
	For the reasons I have given, I believe that it is premature to take a power to set up contingency funding. I shall listen carefully to the Minster's arguments, but even if he convinces me that it is right for the Bill to contain the power, I am sure that it would be equally right for the Bill to contain the additional safeguards in terms of parliamentary scrutiny that I have set out in Amendment 160. I beg to move.

Viscount Eccles: My noble friend's argument again raises a familiar point, which is that given current circumstances and the way in which the Bill was originally envisaged, there must be a danger that many parts of it will not be brought into action under secondary legislation for a long time to come, if ever, because current circumstances simply would not allow the actions envisaged in the Bill to be taken. The Government should give careful thought to this between now and Report because it cannot be a good thing to enact a Bill in circumstances where large parts of it are impractical.

Lord Stewartby: Briefly, I support what my noble friends Lady Noakes and Lord Eccles have said. This is one of those places in the Bill when it would be sensible for the Government to take our arguments on board. I hope that that will be the outcome.

Lord Myners: The noble Baroness, Lady Noakes, has previously shared with the Committee her interest in the turf. I was minded to think, listening to her contribution, that perhaps she should have her money this afternoon on the 4.10 at Wolverhampton on a horse called Cash in the Attic in terms of whether that would be the right place to have a contingency fund. However, it is a seller and an outsider so it is probably not very charitable of me to recommend that. Instead, in the mood of the Committee, I would suggest Good Spirit in the 4 o'clock at Ludlow.
	Clause 167 provides for the possible future introduction of contingency funds, a method of financing for the Financial Services Compensation Scheme often called "pre-funding". I have already described how, if a very large firm such as a high street bank or building society went into default, the Financial Services Compensation Scheme would need far more money in a short time than it could realistically raise in levies from the industry or borrow in the ordinary way from commercial sources. I have also explained that the two solutions to this issue are pre-funding or access to borrowing from Government. The latter solution is already possible, and the Bill makes provision to make government lending to the Financial Services Compensation Scheme as efficient as possible.
	The clause we are debating provides for pre-funding, and I have already described the detail of how it would be implemented. My colleagues in the Government and I have repeatedly said, as unequivocally as possible: first, that we will not introduce pre-funding now, when the financial sector is already under strain and, secondly, that it would not be appropriate to speculate on when we would introduce it. Given that, I believe that we should also be able to agree that now is not really the time to debate the merits of pre-funding or of a particular proposal to put it in place. That time will be when the Government come forward with a specific proposal to introduce pre-funding to the Financial Services Compensation Scheme.
	There are, of course, cogent arguments for pre-funding, and they may help to address the noble Baroness's perplexity about why we would step down this path. Pre-funding could allow the costs of bank failure to be spread over a longer period of time, before as well as after any failure, and reduce the pro-cyclicality of levy payments; that is, the collection of large levies during a financial crisis. Pre-funding could therefore reduce the risk of contagion and ensure that a failed bank had contributed to the cost of its failure. That is important. The banks would be contributing ahead of any claim on the scheme, and consequently the failed bank would have made contributions towards at least some of the consequences of its failure.
	We recognise there are arguments on the other side. Building up a contingency fund would put pressure on bank capital and cash flow. No one will doubt the importance of that issue at the present time. I can also see the more practical arguments of those who feel pre-funding would be unnecessary if Government give the Financial Services Compensation Scheme access to liquidity through borrowing from the National Loans Fund. I recognise the point that, in a concentrated banking system such as the UK's—alluded to by the noble Baroness—there could never be a contingency fund that would be large enough to cope with every possible failure or more than one failure at the same time. Ex-post levies and borrowing from government would still be needed.
	However, these are arguments about timing and size; they are not arguments about the principle. It is surely right to recognise that there will come a time when it is right to have the debate, and the Bill allows us to do that. The Bill provides for pre-funding to be introduced only after full parliamentary scrutiny under the affirmative resolution procedure. The necessary statutory instruments will have to be laid in draft and debated in both Houses before they are made. There will be consultation beforehand involving the Bank of England, the Financial Services Authority, the Financial Services Compensation Scheme and, of course, the industry itself before any regulations are laid. I hope the Committee will see that there is no reason why this clause should not stand part of the Bill.
	I see the point the noble Baroness is making with Amendment 160, but I feel that it would be unnecessary to have a requirement to produce a rather narrowly focused report before the regulations are made. Regulations to bring in pre-funding would not appear suddenly and without warning. There would be full consultation, and I am sure that process would generate far more information and material than would be found in a report. Parliament will have to debate the regulations, and there will be plenty of briefing from a wide range of sources. I am not sure that an additional report from the Treasury would help noble Lords who are considering any draft regulations. Therefore, I hope that the noble Baroness will withdraw the amendment.

Lord Skelmersdale: Does the Minister realise that he has produced an extraordinary argument for not debating the contingency fund now? The Bill apparently allows the Government of the day to set up such a fund by statutory instrument. Parliament must now decide whether such an action might ever be appropriate. Therefore, I give full backing to what my noble friend said.

Lord Higgins: The proposal is open to the usual objection to a statutory instrument; namely, that when the measure is debated, it will not be amendable, whereas it would be if it were in primary legislation. However, I am puzzled by this. It seems that the Minister is arguing for the power to tax by statutory instrument. This has terrible echoes of the policyholder protection arrangements for pensions, whereby levies were made on final salary schemes that led to a further reduction in the number of such schemes. This sounds similar.
	I understand that the Minister does not want to introduce the measure at the moment, because the people from whom he is raising levies would probably be in the same position as the bank that is supposed to be helped by the contingency fund. Is it proposed that levies made under this arrangement would be deposited in the National Loans Fund? That is the same as general taxation. Do the people contributing to the levy ever get it back? As I understand it, they do not. All that is happening is that a levy is being raised to put money into the National Loans Fund, which may then act—the Government could have done this anyway, out of their own resources—to compensate people under the earlier legislation. This is a strange animal and I hope that the Government will rethink it.

Lord Myners: I take Members of the Committee back to my previous observation that the critical principle here is a contribution by the industry towards the cost of compensation, including by institutions that may in due course fail, so that the burden of their failure is not borne entirely by those who, through caution and prudent management, do not fail. There is a strong argument of equity there. The noble Lord, Lord Higgins, introduces an eloquent argument that seeks to align this with tax. I do not think that it is a tax, because contributions to the scheme will be there to meet obligations and claims on the scheme, and the existence of the scheme should be a source of comfort, reassurance and lower funding costs to the industry.
	I turn to the observations made by the noble Lord, Lord Skelmersdale. I believe that the strength of this proposal is the facility to permit prefunding as and when circumstances are appropriate. As my noble friend Lord Davies of Oldham said earlier, it is not the Government's intention to suggest to Parliament that prefunding be introduced. However, I believe that the principle of creating a facility by which the industry contributes to the protection arrangement, from which the industry itself will benefit, is entirely proper and subject to parliamentary scrutiny and approval. The mechanism will exist at the right time—that clearly will be some time from now—to introduce an element of prefunding.
	Finally, in response to the noble Lord, Lord Higgins, the judgment on the scale of contribution clearly should be taken only after careful consultation and full involvement from the industry. He rightly alerts the Committee to the risk that if the contribution level is fixed at too high a point, it may be a contributory factor to failure, although none of the simulations I have seen suggest that anyone is thinking it would be set at a level which could be so damaging. Although the parallel, conceptually, with the pensions' protection scheme is correct, I do not think that the issue is quite the same. In those circumstances, I would ask the noble Baroness to withdraw her amendment.

Baroness Noakes: The Minister said the cardinal principle was that there should be contribution by the industry. Of course, that has underpinned the Financial Services Compensation Scheme from the outset. He went on to say that it has to be equitable by those which fail. The proportion that those that fail will contribute will be very much at the margins of the burden on the whole industry. So the Minister constructs a little principle of fairness for the institutions that fail to be set against the inequity of those banks which continue having to fund 1 per cent or 2 per cent of the deposit base—or possibly even more because no details are available—against a possibility, which may be remote, of a major payout.
	The Minister says that Parliament can debate an affirmative order. He perhaps is not very familiar with the procedures of both Houses. In the other House, a statutory instrument would be programmed into a Committee, which would not be taken on the Floor of the House. There would be a time limit—perhaps an hour and a half—to debate it and it would not be amendable. In your Lordships' House, we would not be time-limited, but it would still not be amendable. We would have only the option of completely rejecting the statutory instrument. A statutory instrument is not an appropriate vehicle for proper parliamentary scrutiny. Since neither the full justification, nor the timing, nor the quantum, nor the impact of the exercise of this power is before Parliament at the moment, we have a seriously deficient proposal in this Bill.
	Amendment 160 accepts the principle of the Government proceeding in that way. It is a perfectly reasonable approach of requiring the Treasury to make a report to Parliament. Perhaps the report should have covered more things—the Minister said that it was a narrow report—but at least it would allow parliamentary debate to take place outside the confines of the rules of either House in dealing with statutory instruments. I do not think that the Government are taking this issue seriously and I beg leave to test the opinion of the Committee.

On Question, whether the said amendment shall be agreed to? (Division on Amendment 160.)
	Their Lordships divided: Contents 80; Not-Contents 174.

Resolved in the negative; Amendment 160 disagreed.
	Clause 167 agreed.
	Clause 168 : Special resolution regime
	Amendment 161
	 Moved by Baroness Noakes
	161: Clause 168, page 89, line 20, at beginning insert "Subject to subsection (2A),"

Baroness Noakes: I shall speak also to related Amendment 162. These amendments add another subsection to proposed new Section 214B of the Financial Services and Markets Act, introduced by Clause 168. The clause allows the Treasury to make regulations for the Financial Services Compensation Scheme, and therefore the financial services industry, to contribute payments arising in connection with the exercise of the stabilisation powers under the special resolution regime. I am far from convinced that the Financial Services Compensation Scheme should be burdened with such payments, because it goes beyond the original intention for the Financial Services Compensation Scheme. It is justified by the Government on the basis that if the authorities did not act, a failing bank may well end up facing costs on the Financial Services Compensation Scheme. If regulations are ever used, I predict that they will be a complete nightmare to operate.
	My amendments, which are probing, are designed to test the limits of the contribution. They allow the Treasury to seek contributions from a private sector purchaser, or a liquidator or administrator—that is, the people who will have their hands on the assets of the failed bank. While my amendment is permissive, the intention is that the Treasury should have to justify not taking contributions from those sources before charging the Financial Services Compensation Scheme. I hope that the Minister will be able to reassure the House that the Financial Services Compensation Scheme will not simply be viewed as a convenient deep pocket for the Treasury to raid to pick up special resolution regime costs, and that all other contributors to the costs will be looked at in the first instance. I beg to move.

Lord Myners: These amendments concern Clause 168, which provides for the FSCS funding of the SRR. I know that this matter has been the subject of much interest and debate, in the other place as well as here. Before I turn to the amendments, let me set out why the FSCS should be required to contribute to the SRR.
	Intervention under the SRR will, in the vast majority of cases, be undertaken only if necessary to prevent disruptions to financial stability. This is provided for by the specific conditions of Clauses 8 and 9, without which the authorities may not act, and by the SRR objectives which govern the way in which authorities act. While undoubtedly of crucial importance to the general public interest, financial stability also directly benefits the banking sector and the financial services industry more widely. A stable financial system is an essential condition for the financial services industry to operate efficiently and competitively.
	Thus, where the authorities have intervened in a firm for the purposes of preserving stability, there is a strong argument that banks and the financial services industry more widely should contribute to the cost of the intervention. The financial services industry will benefit directly from the authorities taking action in furtherance of the SRR objectives, in particular, the objective of enhanced financial stability and confidence in the banking system. Therefore, it is entirely appropriate that the sector should contribute to measures that achieve these objectives.
	The second consideration is that the trigger for entry into the SRR, which we have discussed in debating Clause 7, is that the firm has either already failed its threshold conditions or is reasonably likely to do so. I have agreed to look at these provisions again to consider whether additional clarity is needed on the wording around the degree of likelihood involved, but I have made it clear that the test should be one in which the prospect of a voluntary or regulatory turnaround of the firm is remote. In other words, the SRR can be triggered only in cases in which, in the judgment of the regulator, the only alternative would have been a default that would have led to a payout under the FSCS. Therefore, but for the use of a resolution tool, the FSCS levy payers would have had to fund the cost of compensation to depositors arising as a result of the failure of a deposit-taker through the FSCS. It is entirely appropriate that the Treasury may provide that the FSCS levy payers should contribute to the costs arising from an exercise of the special resolution regime tools. I believe—or, at the very least, I hope—that the noble Baroness may have some sympathy with this proposal.
	However, it is my understanding from the apparent intended purpose of the amendment that the noble Baroness is concerned that other persons, in particular a private sector purchaser or the insolvent estate, should contribute to the costs of a resolution before the FSCS is called on. I entirely agree that, in some circumstances, a private sector purchaser should be called on to contribute towards resolution costs. For example, if the private sector purchaser were acquiring some of the failing bank's assets or, at a later stage in a resolution, a bridge bank's assets, we would expect it to pay a purchase price reflecting the value of those assets. Where the authorities' intervention had led to an increase in the value of those assets, the purchase price would in most cases reflect it. The purchaser would thus have effectively contributed to the cost of the resolution through the increased price paid.
	However, there are also certain circumstances where it would not be appropriate for the private sector purchaser to be required to contribute to resolution costs. For example, there may be administrative costs or additional compensation costs that a private sector purchaser would not be willing to pay, and a requirement that they do so may reduce the likelihood of a successful private sector solution. Therefore, I do not believe that the private sector purchaser should in all cases pay resolution costs before the FSCS or the authorities.
	I turn to the proposal that the insolvent estate of the residual company left behind after the exercise of the stabilisation power should also fund resolution costs before the FSCS. I have a significant concern about this provision. Taking money out of the estate to fund resolution actions would lead to a smaller pot of money from which creditors and other counterparties left in the residual company would benefit. This is an outcome that we wish to avoid, as demonstrated by the "no creditor worse off" safeguard and objective 5 of the SRR, which emphasises the importance of minimising interference with property rights.
	In the case of one of the more likely resolution actions—a deposit book transfer, as was carried out in the case of Bradford & Bingley—funding the resolution out of the insolvent estate would result in a de facto depositor preference regime. The Government, with the support of banks and investors in banks, have sought to avoid this outcome. Of course there will be a cap on the levy payer's contribution through the FSCS, fixed at the cost levy payers would have paid had the bank failed and the FSCS had had to pay out depositors. This cap will ensure that any recoveries which the FSCS would have been able to recover from the insolvent estate had it paid out in a normal way will be taken into account because the FSCS will not be required to pay more than it would have paid under a normal payout.
	The approach taken in the Bill, whereby the FSCS may bear some of the costs of the SRR, is also consistent with the approach to the costs that the FSCS incurs when paying out depositors should a bank fail. The administrative expenses of the FSCS are not funded by the insolvency estate; these costs are borne by the levy payers.
	I hope that I have provided sound arguments to support the view that, while in some circumstances the private sector purchaser may be called upon to contribute, this should not in all circumstances be the first port of call and why there are also risks in requiring the insolvent estate to be called upon before the FSCS.
	In the case of requiring a private sector purchaser to contribute to the resolution costs, as I have set out, the Government are more inclined to consider funding from a private sector purchaser before FSCS funds, but I do not believe that such signalling is required in the Bill. Such arrangements will naturally form part of any commercial agreement between the parties involved and I therefore do not believe that this part of the amendment is necessary.
	Finally, I recognise and agree with the intention to protect the use of the FSCS's funds which is why we have included a number of safeguards over the use of such money, including a cap and independent verification of any resolution costs. I do not believe, however, that the amendments, which the noble Baroness, Lady Noakes, described as "probing", are the right way to protect the use of such funds. Therefore, I beg her to withdraw the amendment.

Baroness Noakes: I thank the Minister for setting out the Government's views. I remain concerned that the FSCS, especially once it is pre-funded, will look like a convenient pot of money to be used to pick up costs. I am not convinced that an insolvent estate should not in effect pay some of the costs alleged to that insolvency and thereby reduce the amounts available to creditors, as that is a necessary cost.
	The Minister said there was a strong argument that the banking system or ongoing banks should pay. The trouble with that argument is that it actually means that consumers will pay. The banks do not pay in any real sense. The banks' shareholders do not even pay—this is just another cost which is passed on to consumers. The issue, therefore, is whether we localise the cost on to the failure or spread it over consumers. That is the only real issue between us. I would like to localise the costs where the failure occurred, even if that meant less for the creditors or the residual amounts that come out from a sale. I shall consider what the Minister has said between now and Report, and beg leave to withdraw the amendment.
	Amendment 161 withdrawn.
	Amendment 162 not moved.
	Clause 168 agreed.
	Clause 169 agreed.
	Clause 170: Borrowing from National Loans Fund
	Amendment 162A
	 Moved by Baroness Noakes
	162A: Clause 170, page 91, line 24, at end insert—
	"( ) A determination under subsection (3)(a) shall be made in accordance with section 5 of the National Loans Fund Act 1968, but subsection (6) of that section shall not apply."

Baroness Noakes: I can be brief on this amendment, which adds a new subsection to new Section 223B of the Financial Services and Markets Act 2000, introduced by Clause 170. This clause allows the Financial Services Compensation Scheme to borrow from the National Loans Fund. We talked earlier about money going into the NLF; this is about money coming out of the fund to fund payments made by the FSCS. The Minister will be aware that the provision has been warmly welcomed by the British Bankers' Association, which believes that this is a much more appropriate mechanism for funding the FSCS than the pre-funding that has been allowed for.
	To cut though the technicalities, my amendment tries to say that interest charged on the loan should cover the NLF's cost of money but should not allow the NLF to make a profit on it. In another place, the Minister said that the Treasury would want to charge a commercial rate because lending to the FSCS was, in effect, lending to the banks—but he did not specify what a commercial rate was. That rather begs the question what a commercial rate is. The Minister might like to answer that.
	The FSCS will get its money from the banks by way of levies. There is no risk that the Treasury will not get the money ultimately through levies, except in extreme, Armageddon-like scenarios for the financial services industry. There is no risk to the Treasury, so no case for a risk premium for the Treasury. What the various banks could borrow will, of course, vary but, if LIBOR returns to its path at something very close to base rate, it will be difficult to justify the Treasury getting any more than that. My amendment seeks to stop the Treasury from profiteering from its financial relationship with the FSCS.

Lord Myners: I thank the noble Baroness for the brevity with which she spoke. As I look at my daytime job in the Treasury, I have no sense that it is seeking to profiteer at the expense of the banks—quite the opposite, at times.
	We have already extensively discussed the issues of funding the activities of the compensation scheme. Clause 167 allows for pre-funding, and Clause 170 allows for the Government to lend in the most administratively efficient way from the National Loans Fund.
	The National Loans Fund charges interest on the loans it provides. Section 5 of the National Loans Fund Act requires the rate of interest to be set at a level which would cover the Government's cost of funds if, in order to service the loan, they were to borrow money on comparable terms to the loan they were making. I should stress that each loan or class of loans has to be priced individually in this way. The Treasury cannot take a portfolio approach and subsidise certain loans from the National Loans Fund by charging a higher interest rate on others.
	Section 5(6) makes it clear that the Treasury may charge a higher interest rate on loans than the minimum that the section requires. The amendment would disapply that provision in relation to loans to the FSCS. The intention behind the amendment is that the FSCS should be able to borrow money from the Government at little more than the Government's cost of funding the loan. The Government are clear that the costs of the FSCS should be borne by the financial services industry. All parts of the financial services industry benefit from the extra confidence which the existence of the scheme provides to their customers. It follows that appropriate rates of interest should be charged on loans to the FSCS, which is ultimately financed by the financial services industry through the levies that it charges. That includes the interest on any loans that the FSCS takes out, so that those loans are really to the industry. It is right, therefore, that the interest rate should be set using the same principles that apply for government lending to bodies that operate in competitive markets.
	The interest rate will, therefore, have at least to match the European Commission reference rate to avoid any suggestion that the loans amounted to state aid to the FSCS levy payers. There is also an underlying principle: the rate of interest on any loan should reflect the real risk of the transaction, which is important to ensure that the risks and exposures of the Exchequer—in other words, the taxpayer—are properly managed. I hope that the noble Baroness will, therefore, agree to withdraw this amendment.

Baroness Noakes: If the NLF loaned the money today, what sort of rate would it charge? We have talked about translating these words into what they mean on the ground.

Lord Myners: I would be more than happy to confirm this in writing if it would help, but I believe that the NLF would charge the risk-free rate, plus a premium to reflect the risk of lending, but taking into account that the existing levying power is such that the risk of default is low.

Baroness Noakes: How many basis points, then, are in that risk premium?

Lord Myners: It would be unwise for me to speculate on the precise number, but it would certainly be toward the lower end of basis points that would be applied to the extension of credit to companies in the financial services sector.

Baroness Noakes: I thank the Minister for that helpful response. He has given a lot of information in his reply, which I shall consider carefully when I have read it in Hansard, but for today I beg leave to withdraw.
	Amendment 162A withdrawn.
	Amendment 162B not moved.
	Clause 170 agreed.
	Debate on whether Clause 171 should stand part of the Bill.

Lord Newby: My reason for initiating this short debate is to look at some aspects of how the Financial Services Compensation Scheme operates for consumers, as opposed to how the banks contribute into it. We discussed one of these matters last week, on an earlier amendment that the noble Baroness proposed, when we talked about the £50,000 compensation amount.
	I wish to raise two further issues today. First, there is how the scheme covers temporary high balances. The FSA aims to make proposals to deal with such balances, and those are due in the relatively near future. As many noble Lords will be aware, the issue is that many people face situations in their lifetime when they hold temporary high balances in their bank accounts—when they sell a house, for example, or receive a redundancy payout or benefit from an inheritance.
	At the moment, it is impossible for customers who have such temporary high balances to cover themselves against the possibility of the bank failing. They can, potentially, spread the balance between different bank accounts once the money has cleared, but they will have to pay the lump sum into one account initially—and while it remains there, nothing over £50,000 will be covered. The FSA undertook research into that area, and found that consumers were unprepared to pay insurance to secure high bank balances, as they felt that they should not have to insure something that was supposed to be safe in the first place. We believe that the best solution would be some form of temporary 100 per cent guarantee. Of those possible solutions, one of the best options would be an automatically triggered guarantee for balances above the £50,000 limit for a specifically set time. That could be backed by an insurance policy paid for by the bank earning the interest on the large sum temporarily deposited with it. We welcome the Government's views on that proposal.
	The second issue is broader. It relates to depositors in banks based elsewhere in the European economic area, but with branches in the UK. Measures proposed by the FSA do not go far enough to tackle the serious problems that apply to compensation arrangements for EEA banks operating within the UK. Currently EEA banks operate here by obtaining authorisation status with the FSA, also known as passporting. Consumers will be covered by the bank's home state compensation scheme in the event of a bank failing. If that compensation is lower than UK compensation, EEA firms can volunteer to top up their compensation limits by joining the FSCS. Thus, if the Icelandic scheme had honoured its commitments, Icesave customers should have received their first €20,000 compensation, with the rest of the balance up to £50,000 provided by the FSCS.
	Different compensation limits and arrangements between countries cause confusion for consumers. It is not sufficient simply to require passporting firms to make what the FSA has described as,
	"appropriate standardised disclosures to their customers".
	Changes are needed to ensure a single point of contact for consumers to access the full amount of their compensation in their home country. The added risk, which must be addressed, is that foreign Governments will not honour their commitments to pay compensation to non-citizens.
	We suggest that the Government should lobby for a change in EU regulations, making topping up compulsory for passporting EEA banks and requiring member states to act as lenders of last resort for their compensation scheme. Only then can UK citizens feel confident in placing deposits with foreign banks.
	This might have seemed a rather far-fetched concern had we not had the situation with Iceland. That caused real problems and the Government had to step in and bail the banks out. We believe that now is the time for the Government to take up this issue at EEA level. We commend that proposal to Ministers.

Lord Davies of Oldham: I am grateful to the noble Lord for the points he makes on Clause 171. The clause would facilitate the speedy payment of compensation to depositors or facilitate the speedy transfer of their accounts to another bank under the bank insolvency procedure in Part 2 of the Bill. I am sure the noble Lord shares with the Government the objective of speedy restitution, particularly to certain categories of depositors. Obviously, large volumes will take longer, but the whole point of the clause is to respond as speedily as possible to the needs of depositors. I agree with him in that broad concern.
	Another of the noble Lord's concerns is about temporary high balances. I agree with him that that is an important point. Experience over the past few months has ensured that the vast majority of those with resources know the nature of existing guarantees, and that to benefit from the guarantees on £50,000 they must put any greater amounts with different institutions. I appreciate the point the noble Lord makes, that because of the nature of a transaction—particularly the selling of a house—people can have a temporary high balance. I emphasise that we are consulting on this, which is rightly a matter for the Financial Services Authority. I cannot comment on the position at present, except to say that the FSA is all too well aware of exactly the point that the noble Lord has made. It has been made in many different quarters and made in another place with some force as well. He is knocking at an open door if he is seeking to bring this debate to the attention of the authorities. At this stage I do not have an immediate resolution of the point but I accept the representation.
	On the European economic area branches, the Government are bound by the European directive, so the noble Lord is right that if we want to see things change we have to stiffen up the directive, which is subject to review at present. I bring to the attention of the House the obvious point that present problems with the banks are much wider than the United Kingdom. We often mention the United States at this point, but we should not underestimate the problems in Europe as well. The Government are concerned about cross-border payment. We have lobbied for a single point of contact. We accept entirely the noble Lord's anxiety that talking about passport arrangements is not enough as far as the new position is concerned. He has recommended that topping up should be made compulsory. I cannot promise that immediately. However, he makes two important points which we intend to address in consultation with regard to giving effect to them as rapidly as we can achieve.

Lord Newby: I am grateful to the noble Lord for those partial reassurances.
	Clause 171 agreed.
	Clause 172 agreed.
	Clause 173 : Information
	Debate on whether Clause 173 should stand part of the Bill.

Baroness Noakes: I have given notice that I wish to oppose Clause 173 standing part of the Bill in order to pursue a matter that I raised on our first day in Committee but to which the Minister did not respond.
	Under Clause 173, the FSA can make banks give it all kinds of information which it can then make available to the Financial Services Compensation Scheme. There is considerable concern among the banks about the use which might be made of this provision. This is not a concern about providing information per se; it is a concern that the FSA will use this power to impose data requirements on the banks to provide information that the banks do not need for their business purposes, and the effect of that will be to impose costs on the banks on a disproportionate basis. The issue that is currently causing the greatest concern is the proposal for faster payout, which will impose significant additional costs. An independent study by Ernst & Young, which was commissioned by the FSA, the Financial Services Compensation Scheme and the British Bankers' Association, has recently reported on the costs of the faster payout proposals. Those will require banks to marshal their customer data into a single customer view, as well as a number of other systems changes. The Ernst & Young study found that the costs over the first five years just to set up and maintain this system, whether or not it was used, would be in the range of £0.9 billion to £1 billion. This contrasts with the regulatory impact assessment for the cost of the whole of this Bill—not just Clause 173—amounting to no more than £5 million.
	Will the Minister say whether Clause 173 is in this Bill to support faster payout arrangements or for any other purpose? If there is another purpose, I would be grateful if the Minister would set that out. If Clause 173 is there simply to support faster payout arrangements, will the Minister acknowledge that faster payout will be very much less of an issue if continuity of banking services, for which we sought an amendment to Clause 4, is placed in the Bill as an objective of the special resolution regime? This is the way forward that the banks themselves support. They do not support the current proposals set out by the FSA, so Clause 173 is a potential problem. I look forward to the Minister's comments.

Lord Davies of Oldham: I am grateful to the noble Baroness for initiating this debate if it gives me a chance to recover from the past sins of omission that she suggested were committed from the Treasury Bench earlier in the Bill.
	The intention of the clause is to allow the FSCS to obtain, in a timely fashion, the information it needs to ensure that compensation can be paid out swiftly. The noble Baroness asked whether the clause was directed towards swift payment, which is of course an important part of the thinking behind it. We need to be able to pay out swiftly and accurately to eligible claimants in the event of the failure of any institution. I am sure that the whole Committee shares in that objective.
	The first subsection allows the FSA to make rules allowing it to obtain information that will assist the FSCS in carrying out its work, particularly preparing for a possible need to pay compensation even when no default is imminent. It allows the FSA to use its existing powers to require individual firms to provide information that would be of use to the FSCS. There is nothing exceptionable about that. It is an even clearer illustration of the concern over payouts for depositors.
	The provisions will also enable the FSCS to undertake contingency planning and risk assessments in relation to the ability of firms to pay out in future, should it be necessary. This is an obvious, sensible contingency exercise for the Financial Services Compensation Scheme, and will also mean that requests for information from the FSA in relation to any such payout will not automatically be taken as a signal that the firm in question is in difficulty. That is important. We do not want the powers to be exercised and the search for information to take place only when crisis potentially looms. Otherwise, every search for information will cause anxiety about the difficulties of the institutions concerned. We are trying to regularise this for the needs of any Financial Services Compensation Scheme payout.
	The remaining subsections allow the FSCS to obtain information directly from authorised persons or certain other persons from the time that the authorised person could be declared in default for the purposes of the scheme. They allow the FSCS to obtain information from a bank which is subject to the special resolution regime—by which time, of course, we will have got into difficult circumstances. This is to enable the calculation of the maximum amount that the FSCS would be required to contribute to the costs of the special resolution regime.
	That, as all sides of the Committee will appreciate, is one of the legislative changes needed to make depositor payout more effective. The provisions in the clause are a fundamental part of the authorities' work to speed up the payment of compensation to depositors by ensuring that the FSCS has the necessary information to make preparations for payout. I am sure that the Committee agrees with those objectives. We want to ensure that information can be collected by the compensation scheme before the bank becomes insolvent. The current position is that the FSCS can get information after the bank has gone into insolvency. By definition, that involves delay in the scheme's response to real needs.
	I agree with the noble Baroness on continuity and service through the special resolution regime. Clearly that is preferable, but it is necessary to have a fast payout as a backstop should the other resolution options prove unworkable. We have debated these at some length in Committee and they have problems attendant upon them. It would do nothing for consumer confidence if a fast payout proved unavailable when the institution was in difficulty.
	The FSA is consulting on the single customer view; the noble Baroness is concerned about the costs that may be borne by the individual institution. The clause is directed towards faster payout but the FSA can require the single customer view under existing powers. Therefore, we are not adding to those in this clause.
	The objectives of the clause are clear. I understand the noble Baroness's anxieties about the element of costs involved. The authorities will direct their search for information towards the objective of a faster resolution of a situation when things have gone wrong. That is an important priority for the Government and is why the clause needs to remain part of the Bill.

Baroness Noakes: I thank the Minister for that explanation, in particular for explaining that existing powers can be used to impose a single customer view. I outlined the costs as being the best part of £1 billion and asked whether they were needed. Do the Government accept that the FSA should not go down that route if continuity of service were made an objective of the special resolution regime?

Lord Davies of Oldham: As I indicated, the FSA has not finished its consultation on this issue. This is a salient point that needs to be settled. I can give some reassurance that the points made by the noble Baroness today are important and need to be given serious consideration. Having acknowledged that the FSA will need to consult on how it operates under this clause, I have not the slightest doubt that this clause is essential. I hope the noble Baroness will feel able to accept that point.
	Clause 173 agreed.
	Clauses 174 to 180 agreed.
	Clause 181 : Recognition order
	Amendment 163
	 Moved by Baroness Noakes
	163: Clause 181, page 96, line 1, leave out subsection (3)

Baroness Noakes: Amendment 163 would delete subsection (3) of Clause 181. This is a probing amendment. We have now reached Part 5 of the Bill, which deals with interbank payment systems. I hope we will not be detained too long, although I have tabled a few amendments to this part of the Bill.
	Subsection (3) says that the Treasury must not designate an interbank payment system which is operated solely by the Bank of England. We have no problem with that since it would mean the bank would regulate itself, but it raises a number of questions. First, who provides the oversight of the systems operated by the Bank of England? The Bank of England, does not do it—quite rightly. Who does? This part of the Bill has some quite heavy oversight provisions relating to interbank payment systems, including the ability to issue penalties. Therefore, who is to check that the Bank meets the principles set out under Clause 185 or the code of practice under Clause 186? Is it the Treasury? From my limited knowledge of the Treasury's relationship with the Bank of England, I do not think it can be said that the former oversees the latter in any meaningful way, so I wonder who would look at payment systems operated by the Bank.
	Secondly, what will happen if the Bank partly operates the system, as I believe is the case with CHAPS? This system will presumably be specified under Clause 181. Does it mean that the Bank will regulate itself in relation to the part that the Bank operates?
	Lastly, my honourable friends in another place got quite excited about a suggestion in the Explanatory Notes, which I could not find in our version, that the Bank of England might step in and start running clearing systems. If that happens—and it is clearly a possibility—that system will presumably already have been specified. Would that lead to the Bank regulating itself in that case? These are points for clarification and I beg to move.

Lord Myners: Part 5 involves the Government legislating to formalise the Bank of England's role in the oversight of payment systems. It is a very important section of the Bill in terms of strengthening financial stability and confidence in a financial system.
	Part 5 seeks to ensure that the Bank of England has the necessary tools to ensure that payment systems are operated in a manner that minimises risks to financial stability and disruptions to business and consumer interests. In addition to providing an important tool for the maintenance of financial stability, these measures will also provide an important new statutory lever for the Bank of England to use in fulfilling its new statutory objective for financial stability, as provided for in Part 7.
	Amendment 163 concerns the Treasury's power, under Clause 181, to make a recognition order in respect of an interbank payment system for the purposes of this part of the Bill. The aim of subsection (3) is to ensure that the Bill does not unintentionally capture internal systems used by the Bank of England to conduct operations in its role as a monetary authority. The amendment seeks to remove this provision, which states that such an order cannot apply to a system operated solely by the Bank of England.
	I do not believe that the amendment is necessary. Although the Bank of England may provide facilities that allow transactions in interbank payment systems to be settled across its balance sheet, it is not currently an operator of payment systems within the meaning of the Bill. If the Bank were to become the operator of an interbank payment system in the future, it would conduct its operations in that field in accordance with its overall statutory responsibilities, including its new financial stability objective under Clause 228. Naturally, the Bank would apply the same principles in conducting its own operations as it would expect of others.
	The risk of an operator taking insufficient account of overall financial stability considerations, which arises in privately operated interbank payment systems, would therefore not arise in connection with a payment system operated by the Bank of England. The removal of this subsection is thus unnecessary and I ask the noble Baroness to withdraw the amendment.

Baroness Noakes: I thank the Minister for that. I think he is saying that, if the Bank ever does operate a system, no one needs to oversee the Bank because it is perfect in all ways and will always do things that can never be criticised. Is that what the Minister is saying?

Lord Myners: It is not what the Minister is saying. I suspect that the noble Baroness is very aware of that and I am grateful to her for providing me with the opportunity to clarify it, should there be any doubt. In the hypothetical example that she provided, the Bank's executive would be accountable to the Court of Directors of the Bank of England for its operation of any payment system, and the Bank, in turn, is accountable to Parliament.

Lord Stewartby: I was taken rather by surprise by subsection (3) as it is not immediately apparent for whose benefit it is included. Is it to protect the Treasury or the Bank of England? What lies behind it? If the Minister says that the amendment is not needed, presumably that will be because the thinking behind subsection (3) copes with questions of whose interest is at stake, but it does not leap off the page. Will the noble Lord explain for whose benefit or protection the subsection should remain in the Bill?

Lord Myners: I shall respond to the noble Lord, Lord Stewartby, by suggesting that the subsection is designed to provide clarity and remove any doubt.

Baroness Noakes: The Minister has given some interesting answers which we will study carefully. I beg leave to withdraw the amendment.
	Amendment 163 withdrawn.
	Clause 181 agreed.
	Clauses 182 to 184 agreed.
	Clause 185 : Principles
	Amendment 164
	 Moved by Baroness Noakes
	164: Clause 185, page 97, line 16, at end insert—
	"( ) Before publishing principles, the Bank must consult the operators of recognised inter-bank payment systems and any other persons which, in the opinion of the Bank, might be affected by the principles."

Baroness Noakes: Amendment 164 would add a new subsection to Clause 185. I shall also speak to Amendments 165 and 167, which would amend Clauses 186 and 193 respectively.
	Under Clause 185, the Bank of England may issue principles, which I understand it already does in its informal oversight arrangements. The operators have to have regard to them when operating their systems. There is a requirement to consult the Treasury but no requirement to consult the interbank settlement players or indeed anyone else. My Amendment 164 would add that.
	Amendment 165 is in similar form in relation to the code of practice which may be issued under Clause 186. I hope that the Government agree that it is appropriate and necessary for the Bank to consult those who will be objects of those principles and codes.
	Amendment 167 would add a new category of compliance failure to Clause 193—the failure to have regard to the principles. This is a probing amendment to find out the status of the principles and the consequences of not following, or not having regard to, the principles. I am not convinced that a failure to have regard to principles should be sufficient to trigger things such as penalties, which are then provided for, but having said that, it is important to establish what happens if an interbank payment system does not have regard to the principles. What is the role of the principles in this legislation? I hope that the Minister can explain. I beg to move.

Lord Higgins: I understand that it is proposed that the Bank will publish a set of principles with regard to the interbank payments, and so on, and before doing so will consult operators in the market. I am not clear why this is necessary to prevent destabilisation of the system. I am right at the very beginning of the argument. These are apparently elaborate arrangements for ensuring that the Bank supervises and regulates the interbank payment system. What is the danger if there are unregulated operators working a system of interbank payments?

Lord Davies of Oldham: I am grateful to noble Lords who spoke on this amendment. With respect to the principles behind Clause 185, we do not think that the Bank of England needs to be put under a specific requirement to consult. The Bank intends to adopt the internationally recognised principles developed by the Bank for International Settlements. These principles are set out in the Committee on Payment and Settlement Systems' Core Principles for Systemically Important Payment Systems. The Bank will follow those international requirements.
	As the Committee would anticipate, these core principles are already used by the Bank in its current oversight regime. They are internationally accepted as important for sound, stable and well functioning financial systems, and form part of the Financial Stability Forum's Compendium of Standards. The Bank of England will also take account of other relevant internationally agreed recommendations and best practice in setting its principles, and it will work closely with operators of recognised payment systems in the undertaking of its functions under this part.
	The Bank must also obtain the Treasury's approval before it publishes any principles, which ensures a degree of parliamentary accountability. It is also worth noting that compliance with the principles is not prescriptive. Recognised systems must have regard to the principles in operating, but not doing so does not constitute a compliance failure. I hope that I have covered the issue with regard to Clause 185.
	Amendment 165 makes a change with regard to the codes of practice provided for in Clause 186. This was discussed in the other place and, like my honourable friend the Economic Secretary during Committee stage in the other place, I can confirm that the Bank will seek to consult with the operators of payment systems in developing codes of practice. However, the codes of practice are intended to function as a flexible mechanism to set binding standards that can be applied, as appropriate, to one or more recognised interbank payment systems as needed. They will focus on a more specific level of detail than the principles. For example, a code of practice may require certain types of system to observe specific minimum standards in relation to business continuity. However, we do not believe that it is necessary to insist on consultation in primary legislation, given that the Bank will develop relevant codes of practice by working with the payment systems concerned as appropriate, which I think was the noble Baroness's anxiety. I hope that gives her some reassurance.
	Amendment 167 extends the definition of compliance failure in Clause 193 to include a failure by an operator of a recognised payment system to "have regard to" the principles. We do not think this amendment is necessary. The principles published by the Bank of England will be high-level and over-arching. All recognised interbank payment systems must have regard to those principles. However, they do not set out detailed provisions about the operation of payment systems, but instead provide guidance about good practice in operating the systems. It would not be appropriate for failure to comply with the principles to trigger a compliance failure.
	In practice, if the Bank thought that a system's observance of a principle was inadequate, it would engage in dialogue with the system and monitor progress, for example via regular meetings. The Committee would recognise the seriousness of that position, and the necessity for the Bank to engage in discussions. If that proved insufficient, the Bank might use additional information-gathering powers by commissioning an independent report, which we provide for in Clause 192, to assess whether the operator is taking sufficient account of the principles. Based on this analysis, the Bank could then use its powers to issue a code of practice or directions, or to require the payment system operator to make rule changes. Failure to adhere to such measures would constitute a compliance failure, and the Bank could impose a sanction. We specify this in Clauses 194, 195 and 196. I hope that I have illustrated how the principles and code of practice are intended to work. Therefore, I reassure the noble Baroness that she can withdraw her amendments with confidence.
	The noble Lord, Lord Higgins, asked what danger we are addressing with these clauses. The arrangements in the Bill replicate and formalise the existing role of the Bank, to which I referred earlier, in overseeing payment systems. The noble Lord does not need me to emphasise that payment systems are fundamental to the efficient operation of financial markets, and the Bank needs powers over them. That is what these clauses identify. I hope that I have given sufficient reassurance for the amendment to be withdrawn.

Baroness Noakes: I am grateful to the Minister for setting that out. I thought earlier that he was saying that principles were high-level things that somehow needed Treasury approval, but that the worst that would happen if you were not complying with them would be that you would have a meeting, whereas breaking the code of practice, which did not require Treasury approval, could result in penalties. That seemed strange, but the Minister squared the circle when he explained the link with an independent report under Clause 192 that could take account of principles. I am therefore satisfied with the Minister's answer. I beg leave to withdraw.
	Amendment 164 withdrawn.
	Clause 185 agreed.
	Clause 186 : Codes of practice
	Amendment 165 not moved.
	Clause 186 agreed.
	Clause 187 agreed.
	Clause 188 : Directions
	Amendment 165A
	 Moved by Baroness Noakes
	165A: Clause 188, page 97, line 37, at end insert—
	"( ) An inter-bank payment system, its officers or servants and members of its governing body shall not be liable in damages for anything done or omitted to be done when such act or omission occurs in accordance with a direction given by the Bank of England under this section."

Baroness Noakes: Amendment 165A adds a new subsection to Clause 188, so that if an interbank payment system does or does not do something in accordance with a direction given by the Bank of England under Clause 188, it will not be liable for damages. The amendment has been suggested by the Payments Council, an independent industry-led body that brings banks and users together to discuss strategic issues in relation to payment systems.
	The council accepts the need for the Bank to be given powers, in Clause 188, to instruct an interbank payment system to act, even if the rules of that system preclude this, as might be the case with a bank that is being dealt with under the special resolution regime. It is normal for a bank in financial difficulties to be excluded from a payment system, and the Bank may want to overrule that. The concern that has been expressed relates to possible actions by creditors of the failing or failed bank against the payment system; for example, for allowing retail depositors to withdraw their money, potentially disadvantaging the main body of creditors. How does the Minister see the position of interbank payment systems that are the subject of a direction? If there is any risk to the payment system in complying with the direction, how will it be protected? I beg to move.

Lord Davies of Oldham: I am grateful to the noble Baroness for the way in which she introduced her amendment, and for the fact that she accepts that the power given to the Bank of England is important. The Bank will make a direction to the operator of an inter-bank payment system only where it is necessary in the interests of protecting the stability of or confidence in the UK financial system, or to protect business or other interests in the UK. I would have been shocked if the concept of the power had been challenged in a direct way and I am relieved that all sides of the Committee endorse that position.
	In undertaking its formal oversight role in accordance with this part of the Bill, the Bank will work collaboratively with the operators of payment systems. It will communicate regularly in order to ensure that recognised payment systems are being operated in a way that minimises deficiencies and the likelihood of disruptions to inter-bank payment systems that could give rise to financial instability or other concerns. The Bank will give directions only in the event that other informal and formal regulatory tools are ineffective or where action is urgent because it is necessary to avert a particular risk.
	As in the case of the intervention powers of other authorities—for example, the FSA's powers to give directions to the managers of authorised unit trust schemes—it is inappropriate to exempt the operators from liability in damages as a result of those directions. The payment system in question will have been recognised as having systemic or system-wide importance, including for business or other interests across the UK. Therefore, any directions with which the Bank may ask a system to comply will ultimately be preventive in order to seek to ensure that the system is not running unnecessary risks that could threaten financial stability. I hope that I have established the significant purpose of this clause and indicated how the Bank will operate its power under this clause in consultation and fully in accord with the seriousness of the potential difficulty that might arise—namely the Bank's enhanced role in protecting the stability of or confidence in the UK financial system, or to protect our business or other interests. I hope the noble Baroness feels that I have justified the clause enough to enable her to withdraw the amendment.

Baroness Noakes: I thank the Minister for his response but he did not deal with the point that I raised. He described issuing a direction in the context of a payment system being important to financial stability, but my point concerned a failing bank which needs continued access to the payment system for continuity of banking services, or something like that. The rules of a payment system are usually to chuck out someone who is financially a bit dodgy—that would be the normal practice—but the Bank is saying, "No, you can't apply your normal rules. We want you to continue to take this failing bank in order to keep things going". My point was to ask whether the operators should at that stage have an indemnity in doing something that, under the terms of their rules, they would not normally want to do. We are not talking about a payment system that is itself threatening financial stability, and which will therefore take whatever pain the Government want to impose on it. We are talking about a payment system that is happy to comply with whatever is necessary but which is also concerned about the consequential impacts of claims against it by other parties. The Minister did not address that point.
	I think that the Minister also said that there were no equivalent provisions in the Financial Services and Markets Act. It is my understanding—I do not have the chapter and verse as I do not have the Act with me—that there were similar situations within the Financial Services and Markets Act where indemnities were provided. I am sorry to press the Minister on these points but they have been raised with me by the Payments Council. I wonder whether he can help.

Lord Davies of Oldham: I disagree. We do not think that it is appropriate to extend the FSA's powers to give directions to the managers of authorised unit trust schemes to exempt the operators from liability in damages as a result of those directions. After all, the power to give directions is to ensure that the system is being operated in a way that does not threaten financial stability or disrupt markets.
	We do not intend to use the power in the way that the noble Baroness suggests as it would involve a more limited operation with regard to potential creditors. We are talking about a significant failure in the system, in which case talk of indemnity is misplaced. I alluded to the Financial Services Authority's powers in this area because those do not exempt operators from liability in damages as a result of directions which the authority may give. I am sorry if I have not been entirely clear but we may have been at cross-purposes over the nature of these powers. I am seeking to explain that these powers would operate at a more substantial and significant level than in the instance given by the noble Baroness. In such circumstances, indemnity would not be appropriate.

Baroness Noakes: I hear what the Minister says, and I shall not go into the question of the Government using those powers in the context that he described. Is he saying that the Government would not use these powers to instruct a payment system to keep within that payment system a bank that would be required to leave the system under the terms of that system? I gave the example of a bank that failed to satisfy financial conditions and would therefore be deprived of ongoing membership—which I understand is a normal term of payment systems. Are the Government saying that these direction powers would not be used in such an instance? It is that kind of instance that is causing the problem.

Lord Davies of Oldham: On the noble Baroness's specific point, I am seeking to identify the importance of the powers—which would, after all, be withdrawn if she pressed her amendment and the clause were deleted.

Baroness Noakes: If the Minister looks at the amendment he will see that I am not seeking to delete the clause. I am seeking to add a subsection to offer some protection to the payment systems that act in accordance with the directions.

Lord Davies of Oldham: The noble Baroness is right; I withdraw that point. I have been dealing with so many debates on clause stand part that I misconstrued the argument.
	I was seeking to emphasise the level of the powers within the clause and explain why the clause is essential. The noble Baroness has raised an important point but it is not four-square with the way in which the Bank of England would intervene at this level. I realise that that may not be a satisfactory response, so I shall write to the noble Baroness. If I do not convince her, the issue will undoubtedly be raised again.

Baroness Noakes: The Minister correctly identifies the fact that he has failed to deal with the amendment to my satisfaction. As he will be aware, the time between now and Report is almost non-existent as we are operating way outside the normal intervals. I am not sure that writing to me will be helpful unless there is a very rapid response tomorrow, which would be helpful. I will need to consult those who raised the point with me; the Payments Council regarded it as a serious point. I will almost certainly have to return to this on Report.

Lord Davies of Oldham: The noble Baroness has not yet withdrawn her amendment, so I am not tardy. I shall ensure that I reply to her immediately.

Baroness Noakes: I am grateful to the noble Lord. I beg leave to withdraw the amendment.
	Amendment 165A withdrawn.
	Clause 188 agreed.
	Clause 189: Role of FSA
	Amendment 166
	 Moved by Baroness Noakes
	166: Clause 189, page 98, line 3, after "has" insert "notified the Bank that it has"

Baroness Noakes: Amendment 166 amends Clause 189(1). Clause 189 is headed "Role of FSA", but the first two subsections describe what the Bank should do in relation to the FSA and not what the FSA should do. I have proposed the deletion of subsection (1) for a different reason. It says:
	"In exercising powers under this Part the Bank ... shall have regard to any action that the FSA has taken or could take".
	Does that mean that the Bank will have to make itself omniscient about what the FSA does and, even harder, what the FSA might do? I am sure that the Bank should have regard to anything that the FSA tells it, and my amendment allows for that. It might also be reasonable for the Bank to have regard to anything that it happened to know about the FSA's actions. But I do not think that it is reasonable to impose on the Bank some kind of all-knowingness about what has happened or might happen in the FSA. I beg to move.

Lord Davies of Oldham: I am delighted to do my best to resolve the noble Baroness's anxieties yet again. However, I do not think that her anxieties in this regard are well founded. While the Bank of England will be the sole regulator of recognised inter-bank payment systems, the FSA will continue to be the regulator for recognised clearing houses and investment exchanges. Some of these recognised clearing houses and investment exchanges may themselves run inter-bank payment systems embedded within their operations. These embedded payment systems may be recognised by the Treasury by an order under this part.
	The danger is that that could lead to dual regulation, which is why this clause makes provision to try to avoid that. That is the objective of the clause. Subsection (1) requires the Bank to have regard to any action the FSA has taken, or could take, with regard to an embedded system. Amendment 166 seeks to add a new constraint in that the FSA must notify the Bank of any action that it has taken or could take. We do not think that that is useful. It presupposes that the Bank and the FSA cannot or do not communicate fully with one another in performing their respective regulatory functions, but that is not the case. The Bank and the FSA already communicate with one another in respect of embedded payment systems, and the formalisation of the Bank's role will not undermine this communication.
	In addition to the existing channels of communication, and in order to formalise the arrangements when dealing with such systems, the Financial Services Authority and the Bank will set out a memorandum of understanding on how to deal with regulatory issues connected with embedded payment systems. That will ensure that there is full communication between the two authorities. To facilitate this, they intend to meet on a regular basis to share views on issues concerning embedded payment systems.
	The Government took the opportunity to table an amendment on Report in the other place to elucidate further the delineation of roles between the FSA and the Bank of England. Subsection (2) now specifies that the Bank of England must consult the FSA before taking action in respect of an embedded payment system. Subsection (3) now specifies that if the FSA gives the Bank of England notice that it is considering taking action on an issue that affects an embedded payment system, the Bank may not take action without the FSA's consent or unless the notice is withdrawn.
	This is designed—as I am sure the Committee will agree—to ensure that there is no duplication between the regulatory functions of the Bank. That is the purpose of the clause. The Bank will be fully aware of the FSA's responsibilities as published in the FSA handbook. It will be working with the FSA and maintaining regular dialogue in the case of embedded payment systems. I share the noble Baroness's view that this is an area of real concern. This memorandum of understanding will further consolidate their working relationship. I hope the Committee will agree that the Government have done all that they should, both in my response today and in the amendment moved in the other place, to ensure that this position is clear. I hope I have thereby allayed the noble Baroness's anxieties and that she feels able to withdraw her amendment.

Baroness Noakes: I thank the Minister for that response. Those who believe that banking supervision should be returned to the Bank of England would find much in what the Minister has said to support that position. He has described the most convoluted arrangements around a relatively minor part of the activities of each organisation, just to overcome both organisations dealing with it. The Minister has dealt with the points that I raised, but he has also highlighted some of the absurdities of the position that we now find ourselves in. I beg leave to withdraw the amendment.
	Amendment 166 withdrawn.
	Clause 189 agreed.
	Clauses 190 to 192 agreed.
	Clause 193: Compliance failure
	Amendment 167 not moved.
	Clause 193 agreed.
	Clause 194 agreed.
	Clause 195: Penalty
	Debate on whether Clause 195 should stand part of the Bill.

Baroness Noakes: I have given notice that we oppose Clause 195 standing part of the Bill because it gives the Bank a completely untrammelled power to levy penalties for a compliance failure. Furthermore, it creates an incentive for the Bank to levy penalties because the penalty is paid to the Bank. For the convenience of the Committee, I have grouped this with Clause 219 stand part, as that clause concerns an identical provision in Part 6, which deals with banknotes.
	I have no problem with penalties for compliance failure, as that is an accepted part of regulation, but I do not believe that it is proper for the Bank to be given an unlimited power of penalty-raising. In other parts of the legislative sphere we can find multiple turnover limits which apply to penalties under competition law. The FSA is required under its statute to set out and publish a scheme of how it will apply penalties. There is absolutely no guidance in this clause, and no requirement for the Bank to do anything such as set out a scheme. Indeed, an operator may fare better by being prosecuted under Clause 196 because at least that system imports rules about fines from the criminal justice system.
	As I mentioned earlier, I also have a problem with any penalty being paid to the Bank. Why should the Bank be enriched by a large penalty? I can see that it would want to recover its costs from dealing with a recalcitrant system operator, but what public policy is served by the Bank profiting from its activities?

Lord Higgins: There is a general sense that if there is a compliance failure, it is compliance failure as much by the regulator as by the bank committing what is deemed to be an offence. I share my noble friend's surprise that the penalty is in no way specified. It simply says that the Bank may require payment of a penalty in respect of a compliance failure. However, we have no idea at all, as far as I can see, what the scale of that penalty might be. In almost any penalty imposed by legislation, some limit is set on it. Why have the Government simply given the Bank of England an open cheque to impose penalties on banks or transfer systems, and then have it enforced as a debt payable to the Bank?

Lord Davies of Oldham: I am grateful to both noble Lords who have spoken to this amendment. The Government regard Clause 195 as playing a crucial role in the new regulatory regimes for both inter-bank payment systems and the issuance of Scottish and Northern Irish banknotes as set out in Parts 5 and 6 of the Bill. In Part 5, Clause 195 gives the Bank of England the power to impose—as the noble Lord, Lord Higgins, has drawn attention to—a financial penalty on the operator of a recognised inter-bank payment system that has committed a compliance failure, as defined in Clause 193. This power to impose a financial penalty is intended to act as a deterrent against the non-compliance of operators of recognised payment systems with the obligations under Part 5. It reinforces the need to comply with, for example, provisions of codes of practice or directions intended to ensure that systems are not being operated in a manner that could present a threat to financial stability, and to ensure the robustness of payment systems of systemic or system-wide importance. I am sure the Committee recognises the public interest in both those objectives.
	In Part 6, Clause 219 provides that banknote regulations may enable the Bank of England to impose a financial penalty on an authorised issuing bank that has breached the banknote regulations. This is an important enforcement tool for cases where the breach is not so severe that it warrants withdrawal of an authorised bank's issuing rights, which is a power that could be used in the most extreme case, yet warrants the imposition of a penalty to ensure compliance with regulation rules that are necessary to offer note-holders protection.
	Clauses 195 and 219 share an underlying purpose. Although the specific details may vary, I would like to discuss the imposition—which the noble Lord, Lord Higgins, was particularly concerned about—of a penalty in general terms which are applicable to both parts, as the grouping of these two issues into this single debate suggests. I am grateful for that grouping. The power to impose a financial sanction is intended to act as a deterrent and enforcement tool, underpinning the new regimes provided for in the Bill. I give way.

Baroness Noakes: The Minister is being very interesting, but it might speed up the Committee stage if he answered the single point that I raised, which was about unlimited penalties and whether the Bank should raise them. I do not think that either I or my noble friend Lord Higgins has queried whether penalties are an appropriate part of the system of regulation. Indeed, I specifically said that I accepted that.

Lord Davies of Oldham: I am grateful to the noble Baroness because she has sharpened my argument and, I hope, shortened my contribution. The Financial Services Authority has the right to impose these penalties, but both it and the Bank of England, as in this case, have to be proportionate in dealing with the compliance failure. We want the clause to be in this form so that it offers the regulator flexibility in determining the appropriate penalty, having regard to the circumstances in each case. There will be different potential breaches, so it is difficult to be specific in primary legislation, as I am being pressed to be at this stage.
	The Bank would impose financial penalties in proportion to the seriousness of the compliance failure or regulation rule breach and to the ability of the system operator or authorised bank to pay. Any public authority would need to act reasonably in setting the penalty. I indicated earlier the constraints on the Bank, which apply also to the FSA in different circumstances. The purpose of the penalty clause is to give the power to impose a financial penalty, but the authorities must act reasonably and in proportion to the compliance failure. Failure to do so would be subject to challenge.
	Noble Lords are pressing for a tariff of penalties in primary legislation whereas we are dealing with a range of potential difficulties that give rise to the need for compliance. I am not able to give a range in those terms, nor would it be reasonable for the Government to attempt to do so in primary legislation. The clause gives the power—the necessity of which I hope is not being denied—in the understanding that the authorities have to act reasonably when they invoke the penalties. That is the best that I can do for the noble Baroness on this amendment.

Lord Higgins: I am puzzled by the Minister's reply. Some of his remarks seemed not to be related to Clause 195 at all; it is, after all, a very simple clause of only a few lines. Can he tell us of any other provision in primary legislation where there is no limit whatever on the penalty which the Bank of England or any other body can impose? I have difficulty in thinking of any other part of the law where the penalty is totally unspecified. He spoke about it being done in primary legislation but, unless I am mistaken, that is the only place where this matter is dealt with. The clause is not subject to any further specification by way of statutory instrument or anything else. The whole thing is set out in primary legislation but is totally unlimited and will be enforced by the Bank as a debt. I simply do not understand. Have the Government any idea of what the scale of such a penalty might be? The Minister seemed to say that the penalty would depend on the ability to pay of the person not complying. That seems an extraordinary way to do it. One would expect a penalty to be imposed if there is an offence, but not that it will be imposed on the basis of whether someone can pay. We do not say in any other part of the law that we are going to have a penalty and that the fine for a speeding offence, for example, will depend on the ability of the person to pay. I find it quite objectionable that one should give an unlimited penalty power to the Bank of England in primary legislation with no qualification in secondary legislation.

Lord Davies of Oldham: I hope that I can be a little more helpful to the noble Lord, because he is on to an important point. I tried to emphasise that the FSA publishes guidance on the level of penalties, but the FSA's powers are unlimited in the primary legislation governing it, the FSMA.

Baroness Noakes: I accept what the Minister said about what is in the FSMA, but the FSA has a statutory obligation to set out a scheme for penalties, as it has. However, there is no equivalent in this Bill, which is one of the reasons why we object to it.

Lord Davies of Oldham: I was coming to that. In view of the strength of the representations made, we will consider whether the Bank of England should publish a policy on a payments system and compliance failure penalties. We will return to the issue on Report to clarify the matter further. I seek merely to identify that it is entirely right that we should seek to resist the concept outlined by the noble Lord, Lord Higgins, that an order of offences and their respective penalties should be in the Bill. We have difficulties with the concept. However, we will certainly return to it because I understand the dissatisfaction expressed both by him and by the noble Baroness, Lady Noakes.

Viscount Eccles: Will the Minister consider giving some notice about non-compliance and an opportunity to put it right? One of the Committee's difficulties is that we do not know, because we have not been given any examples, what non-compliance might be, how quickly it might occur and how difficult it would be to put it right, all of which are matters that the Government are in a much better position than I am to consider. The Minister mentioned a remedy. Is it judicial review?

Lord Davies of Oldham: If the authorities acted unreasonably that would be the ultimate position. However, the noble Viscount's friends on the Back Benches and the Front Benches are pressing us to indicate our thinking about the range. I maintain that the Bill as drafted is right and justified and gives powers that are not different from those that the FSA already enjoys in similar circumstances. I have conceded that at Report stage we will need to flesh out a little more what might be published by way of guidance or a policy on the payments system. I hope that noble Lords will think that I have gone as far as I can.

Lord Higgins: We are in danger of becoming a conversation—one Member stands up, then the Minister stands up, then another Member stands up and so on—which is not the normal way of going about it. We greatly appreciate the Minister's enthusiasm but our progress would be a little more orderly if he perhaps waited until everyone had had their say.
	The idea that the Bank of England will decide what the penalties ought to be seems the wrong way of going about it. We ought to be given an explanation of what the offences are likely to be and the consequences of non-compliance, and then fit some sort of limit. As the provision stands—I welcome the fact that we will come back to it on Report; the House will certainly need to do that—we have no idea whether the Government envisage penalties of £1 million, £1 billion or £1 trillion. We have not the remotest idea of what size they think the penalty might need to be to ensure compliance in an important matter.

Lord Davies of Oldham: It is, however, possible that the noble Lord would be stretched in identifying what the misdemeanour might amount to—whether it was something of catastrophic significance for the financial system or something more marginal. We are providing for penalties that deter. I am sure that the noble Lord will accept that.
	I accept the noble Lord's upbraiding about this becoming a conversation. That is not my wish. It is merely a reflection of the fact that when I have given what seems to me a conclusive and accurate answer, a little dispute crops up, generally from two sources, namely the noble Lord, Lord Higgins, and the noble Baroness, Lady Noakes. I am not complaining about that. I had not anticipated that the noble Viscount, Lord Eccles, was coming into the debate. I owe him a sincere apology. He asked me two questions. It is true, as the noble Lord, Lord Higgins, suggests, that I was almost involved in a conversation, although Committee stages do have the benefit of some flexibility. I agree with him entirely: I should seek to be more comprehensive and more conclusive and I will do my best.
	The noble Viscount, Lord Eccles, asked me about appeals. Part 5 can be appealed to the Financial Services and Market Tribunal but Part 6 would have to be the subject of judicial review. He also asked me about a warning notice. Clause 198 says that before imposing a sanction it must issue a warning notice and consider representations before publishing the decision notice and imposing a penalty. There is therefore some notice—I am referring to Clause 198—and I hope I have succeeded in ending the conversation.

Baroness Noakes: We must draw this debate to a close. However, we will raise the issue again on Report even if the Minister does not. I shall merely remark that to hear a Minister express shock and horror at the possibility that a statute might actually specify a penalty leaves me aghast. I will, however, leave that for Report.
	Clause 195 agreed.
	Clauses 196 to 199 agreed.
	Clause 200: Fees
	Amendment 168
	 Moved by Baroness Noakes
	168: Clause 200, page 102, line 4, at end insert "which reflect the costs incurred by the Bank in carrying out its functions under this Part"

Baroness Noakes: I hope that we will not be detained as long with this amendment, which amends subsection (1) of Clause 200. This clause allows the Bank of England to raise fees for its regulatory activities, although I understand that it has no plans to change its current practice, which is not to charge for informal oversight. If Clause 200 is brought into effect, my amendment would ensure that the Bank would recover only its costs of operating the oversight of interbank payment systems and could not enforce some form of pricing which would leave it with a profit which could cross-subsidise its other activities.
	I am aware that the Treasury has to approve fees under subsection (2) but, if a move to charging fees were in the context of some broader changed financial system for the Bank, the Treasury might end up having to pay for some of the things that the Bank does and it may end up with costs on the Treasury's vote. These things are conveniently bypassed at the moment with the Bank's financing system by way of cash ratio deposits. If there were a change with the Treasury having to pay for some things on its own vote, it would have an incentive to ensure that the Bank made as much profit as possible to achieve cross-subsidy.
	I hope the Minister will therefore see this as a reasonable amendment to protect the financial interest of the interbank payment systems operators. I beg to move.

Lord Davies of Oldham: I am grateful that the noble Baroness recognises that the Bank does not currently intend to charge fees for its routine oversight of payment systems. That practice will continue. This clause future-proofs the legislation against the potential eventuality that the Bank's overall funding model might change. It shows that the Bank could continue to resource its oversight activity in such an event. Where the Bank incurs exceptional expenses in relation to its oversight activities—for example, due to the engagement of an expert to carry out an inspection, which we provide for in Clause 179—the Bank would aim to recover those costs from the system concerned rather than through imposing a general levy on all operators. That is a proper and just way of going about it. The scale of fees would be set by the Treasury by regulations to ensure fees are proportionate and can be challenged under judicial review if considered disproportionate or unreasonable. The clause is there to future-proof the position against a changing situation, and I hope that the noble Baroness will consider that the Government have been judicious in thinking ahead in these terms and that the clause is indeed necessary as it stands.

Baroness Noakes: The Minister has not replied to the point I raised, which is whether or not the fees, when set, should be cost-based. He gave one example of a high cost where someone was appointed and the particular operator would pay. That sounded fine. The issue behind my amendment, however, was about whether the fees would be cost-related. The Minister did not answer that point.

Lord Davies of Oldham: To answer straightforwardly, yes, they will be cost-related.

Baroness Noakes: I say straightforwardly therefore that I withdraw the amendment.
	Amendment 168 withdrawn.
	Clause 200 agreed.
	Clauses 201 and 202 agreed.
	Clause 203: Saving for informal oversight
	Debate on whether Clause 203 should stand part of the Bill.

Baroness Noakes: We oppose Clause 203 standing part of the Bill, in order to understand what is intended by it. It is headed "Saving for informal oversight", though it refers not to informal oversight but to "having dealings". That is not the most elegant of terms but it implies contractual or other relationships rather than oversight. Will the Minister say what sort of "dealings" the Government are seeking to legitimise with this clause?
	Can the Minister also say way why the clause is necessary? I searched the Financial Services and Markets Act for an equivalent provision in relation to the FSA. I could find nothing in the FSMA which said that the FSA can have dealings with the bodies it subjects to formal regulation. If the FSA does not need to have statutory cover for informal dealings with its regulatees, why does the Bank? As usual, the Explanatory Notes gave no additional insight, so I was forced to table this clause stand part. I look forward to enlightenment.

Lord Davies of Oldham: I hope to enlighten the noble Baroness on the objectives of the clause. Clause 203 ensures that nothing in Part 5 prevents the Bank of England maintaining its ability to carry out informal, non-statutory oversight in the case of non-recognised payment systems. Secondly, it ensures that in its dealings with recognised interbank payment systems, the Bank is not limited to the provisions in Part 5. The purpose of the clause, therefore, is to ensure that the provision of a statutory role for the Bank of England in oversight of recognised payment systems does not limit its ability to continue to engage with both recognised and non-recognised payment systems on a non-statutory basis, which is the basis on which it works at present. The Bank will need to engage with non-recognised systems—for example, to assist with its assessments of new or potential candidate systems for recognition.
	Although there are no weaknesses in the existing arrangements, the authorities have been working since early last year on developing a clearer and more robust framework for the oversight of payment systems. This includes the need to take into account the potential for payment systems' characteristics and importance to change over time, or for wholly new payment systems to develop and take on systemic importance. I seem to have repeated myself on many occasions, but this Bill seeks to deal with a future of potentially rapid changes to our financial systems. Given the importance of payment systems in the financial systems and, therefore, to wider financial stability and consumer protection, it is sensible to formalise the Bank's role as regulator of this sector, but this does not preclude the need for it to also continue its role of informal oversight. That is the basis of the clause.
	The noble Baroness raised the issue of the Financial Services and Markets Act. The FSA does not require a similar provision in that Act because it does not exercise informal or non-statutory oversight in the same way as we envisage, under Part 5, that the Bank of England will operate with regard to payments systems. So there is a difference in the roles between the FSA and the Bank of England in those terms, which is why we have this clause. I hope that the noble Baroness accepts the position.

Baroness Noakes: I thank the Minister for the point on the FSA, but could he tell me what informal oversight actually is? In what sense is it oversight and in what sense is it informal?

Lord Davies of Oldham: It is in circumstances in which the Bank is in action but not necessarily operating under all the formal structures that we have in Part 5. The noble Baroness is all too well aware that the Bank has an oversight position now; within the framework of that oversight circumstance, we want that to continue.
	The present position has no statutory backing. The Bank to date has chosen to oversee the main wholesale and retail payment systems in the UK and to participate actively in the co-operative international oversight system. It holds regular, usually quarterly, formal meetings with individual systems and is otherwise in frequent contact with them, monitoring their performance and investigating incidents as they arise. Through that analysis, the Bank proposes appropriate actions to mitigate risks arising in the systems. It publishes its finding and assessments in an annual payment systems oversight report, but it has no powers to ensure that risk-mitigating systems are employed.
	We expect the Bank to continue its activity, but the Committee will recognise the importance of the fact that the Bank is doing it on a non-statutory basis, which is why it has no direct statutory powers. Under the framework of this Bill, the Bank's position is considerably strengthened and given a statutory basis. That is the reason for the clause.
	Clause 203 agreed.
	Clauses 204 to 212 agreed.
	Clause 213: Banknote rules
	Amendment 169
	 Moved by Baroness Noakes
	169: Clause 213, page 106, line 1, leave out subsection (2)

Baroness Noakes: We have now got to Part 6, for which we must rejoice. In moving Amendment 169, I shall speak also to Amendment 170.
	I have tabled these amendments in response to the Delegated Powers and Regulatory Reform Committee's first report of the current Session, which we have already debated in part in this Committee. The Delegated Powers Committee pointed out that the power in Clause 212 for the Treasury to make regulations about banknotes is very wide indeed. We could, if we were so inclined, object to it on the basis that the Government should be more specific about what they want rule-making powers for. But I shall not pursue that line and recognise that at least the Government have conceded that regulations should be subject to the affirmative procedure.
	The Delegated Powers Committee pointed out that the arrangements for the allocation of provisions between regulations under Clause 212 and rules under Clause 213 are unsatisfactory. Under Clause 213, regulations can allow the Bank of England to make rules about banknotes, also on a very wide basis. In particular, Clause 213(2) says that regulations can provide that rules can do anything that regulations could do, thus neatly circumventing parliamentary control, because rules so issued would not be subject to any parliamentary process.
	The Committee recommended at paragraph 11 that,
	"the power in clause 213 to make banknote rules should be narrowed, at the least to remove the power for banknote rules to impose unlimited penalties".
	For today's Committee, I propose the removal of Clause 213(2) in Amendment 169. I invite the Government to accept that the regulations cannot confer that degree of power on the Bank of England's rules or, alternatively, to come up with some other restriction of the power. As an alternative, I have also tabled Amendment 170, which amends the financial penalty in Clause 219 so that rules cannot apply a penalty. There would be other ways in which to deal with this issue.
	I hope that the Minister will accept the DPRRC's recommendations and either accept my amendments or undertake that the Government will return with their own amendments.

Lord Higgins: What is the difference between a banknote regulation and a banknote rule?

Lord Davies of Oldham: I am grateful to the noble Baroness and will seek to answer the noble Lord's question in a moment, but not get into conversation style. This is an important amendment, as it draws attention to the contribution and representation of the Delegated Powers and Regulatory Reform Committee on this matter. As this Committee appreciates, the Government take the report from that committee very seriously indeed.
	As the noble Baroness said, the Delegated Powers and Regulatory Reform Committee noted in its report that,
	"the arrangements for the allocation of provisions between regulations and rules seem unsatisfactory",
	and recommended that,
	"the scope of the power in clause 213 to make banknote rules should be narrowed, at the least to remove the power for banknote rules to impose unlimited penalties".
	This recommendation is implemented by this group of amendments.
	I apologise for the fact that this is a slightly lengthier contribution than we have had for most of this afternoon, but I take this opportunity to explain exactly how it is envisaged that the banknote regulations and rules will fit together. As the noble Baroness said, we have accepted that the draft regulations that we have circulated will be subject to affirmative procedure. Not all parts of the regulations are complete and further work will no doubt be needed before they are in a position to be consulted on formally. But I hope that the sight of even a draft set of regulations informs this debate. The intention is that the appropriate level of parliamentary scrutiny will be observed. That is why we have indicated that we expect that the affirmative resolution will be employed for the regulations. I hope to show that the amendments are therefore unnecessary.
	Clause 213 provides that the banknote regulations may require or permit the Bank of England to make banknote rules about any aspect of the treatment, holding or issuing of banknotes by authorised banks. In practice, the regulations will not require or permit the rules to do everything that they themselves may do; there will be a natural division of appropriate responsibilities between the Treasury and the Bank. The regulations may delegate to the banknote rules anything that the regulations are permitted to do under primary legislation, subject to them being approved. This offers the capacity to make detailed provision, as appropriate, in either banknote regulations or the banknote rules. In both circumstances, this offers greater flexibility and scope to make detailed provision than would be appropriate for inclusion in primary legislation. I am sure that the Committee will accept that argument.
	It is important for the Bank to have flexibility, within the remit of the regulations approved by Parliament, to make changes to its rules in order to adapt to changing or particular circumstances. It is envisaged that banknote rules will be largely focused on operational aspects of the new framework, rather than the underlying principles of banknote issuance. For example, under regulation 9 of the draft indicative regulations as circulated, banknote rules must set out the procedure that an authorised bank must follow for the purpose of ceasing the issue of banknotes.
	As a further example, the banknote rules may set out detailed provision for the note exchange programme, as set out in regulation 13 of the draft regulations, which can be tailored as appropriate to the practicalities of exchanging a particular issuing bank's notes. We could not think of such detailed provision being set out in primary legislation for cases where the Bank of England is best placed to determine what it needs in particular circumstances, as the procedure will have to be tailored to circumstances such as the number of notes in issue, or the locations at which holders of those banknotes will be able to exchange them, and so on.
	I reassure the Committee that the banknote regulations and rules are intended to complement each other, not to provide duality or duplication, and, categorically, that Clause 213(2) is not intended to provide a means by which the need for parliamentary scrutiny can be circumvented. It is important for the Bank of England to have additional freedom—within the remit of the Parliament-approved regulations—to make and modify detailed banknote rules, adapt to changing or particular circumstances and capture operational detail. Not all such detail can be comprehensively pre-empted in primary legislation or statutory instruments.
	On the specific aspect of financial penalty, the Bill provides that the banknote regulations may enable the Bank of England to impose a financial penalty on an authorised bank that has breached the banknote regulations or rules. That is an important enforcement tool for cases where the breach may not be so severe as to warrant withdrawing an authorised bank's issuing rights, yet does warrant imposing a penalty in order to ensure compliance with regulations and rules that are necessary to offer protection to noteholders. The imposition of a penalty will, of course, be subject to judicial review, ensuring that the Bank imposes such penalty as is fair, reasonable and proportionate.
	The Government intend that the imposition of a penalty is to be governed by the parameters of the regulations, which, as the noble Baroness indicated, are to be subject to the draft affirmative procedure and therefore receive parliamentary scrutiny. We recognise the Delegated Powers Committee's important recommendations and we are looking particularly at this clause, and others on which it has commented, to consider whether further changes are needed. I hope that the broad position that I have outlined in defence of the clause meets with the agreement of the Committee, and that the noble Baroness will feel able to withdraw her amendment.

Baroness Noakes: The Minister has put up a spirited defence of the clause. We were seeking not to challenge the possibility of the Bank of England making rules in appropriate circumstances, but to ensure that the recommendations of the Delegated Powers Committee were given effect. It is not enough for the Government to say, "Well, our draft regulations don't give the Bank a power to make penalties by its rules, so that's an end of it". I thought the Minister was saying that at one point, but he ended by saying that the Government were considering what to do about the Delegated Powers Committee.
	The House expects the Government to follow that committee's recommendations. There have been very few instances where the Government have ignored those recommendations, which is why we have a Delegated Powers Committee. Unfortunately, one instance involved the Treasury, which probably makes it think it can do what it likes with that committee's reports. I must, then, signal in the most uncertain terms to the Minister that we would expect the Government to honour the terms of the Delegated Powers Committee—particularly on this, where it is no answer to say, "We currently don't intend to do what the Bill would allow", when the plain fact is that the primary legislation is deficient. The Minister said that the Government are considering it. They have very little time to do so, but we will certainly return to this on Report. I beg leave to withdraw.
	Amendment 169 withdrawn.
	Clause 213 agreed.
	Clauses 214 to 218 agreed.
	Clause 219: Financial penalty
	Amendment 170 not moved.
	Clause 219 agreed.
	Clauses 220 to 224 agreed.
	Amendment 171
	 Tabled by Baroness Noakes
	171: After Clause 224, insert the following new Clause—
	"Guarantees for lending by banks
	"The National Loan Guarantee Board
	(1) The Treasury shall establish a National Bank Loan Guarantee Board (referred to in this Part as "the Board") which is to have the function conferred on it by section (Function of the Board).
	(2) The Treasury will appoint to the Board representatives of—
	(a) the Treasury;
	(b) the Bank of England; and
	(c) the FSA.
	(3) The Board will be chaired by a representative of the Treasury"

Baroness Noakes: I tabled Amendments 171 to 173 in order to debate my party's proposals for a national loans guarantee scheme, which my honourable friend George Osborne launched last year to deal with the critical shortage of credit for business. The Government trashed our proposals at the time, then, two weeks ago, announced a pale shadow of them—the Government's scheme being smaller, less bold and more bureaucratic.
	Last week, the Government announced a further package of measures affecting the banks and lending. We do not know whether they will work—the financial markets seem less than clear on that—and we remain concerned about credit in general, and in particular for those businesses that the measures announced do not wholly cover. We believe, then, that a national loans guarantee scheme ought to be introduced by the Government. However, in view of the constraints on the Committee today, I shall not be pursuing this and, accordingly, I shall not be moving Amendment 171.
	Amendment 171 not moved.
	Amendments 172 and 173 not moved.
	Clause 225 : Consolidated Fund
	Amendment 173A
	 Moved by Lord Myners
	173A: Clause 225, page 110, leave out line 32

Lord Myners: Before turning to the amendments, I will take a moment to summarise the purpose of Clause 225 and explain the amendments that have already been made to the original clause in another place. The purpose of Clause 225 is to put the use of public money in the proposed bank resolution or insolvency arrangements, or in the more general provision of financial assistance to banks and their customers, on to a proper footing.
	The Treasury and other government departments have powers derived from statute or common law to do various things including, for example, to provide guarantees or indemnities, or to make loans. They have only the ability to spend money to make good on these commitments if Parliament provides the money. This is usually done through estimates approved in the annual appropriation Acts.
	As a matter of law, the annual appropriation Acts can give full statutory cover for expenditure in estimates, but it is a long-established convention that there should always be specific enabling legislation to enable the finance for a new service to be provided from public funds. Clause 225 would provide that statutory cover. However, the original clause only provided for financial assistance to be given to UK authorised institutions, which have permission to accept deposits; in other words, UK deposit takers.
	It was realised, particularly in the light of the events last year surrounding Icelandic banks, that such a limitation could make it more difficult to protect the interests of UK consumers or safeguard the interests of UK taxpayers when an overseas institution fails. It was also realised that the original clause would not provide cover for assistance to be given to financial institutions, which were not themselves deposit takers—for example, bank holding companies that were not themselves authorised persons. Amendments made in the other place dealt with these issues, and the government amendments I have tabled will address two further issues that have arisen more recently.
	Amendments 173A and 173E will provide statutory cover for expenditure incurred in connection with schemes run by government departments other than the Treasury. The amendments will provide statutory cover for schemes where the financial assistance being provided will facilitate the activities of the bank or financial institution and provide a benefit to a third party—such as customers of banks or other financial institutions—or to the wider economy. This will provide statutory cover for any expenditure incurred in connection with schemes such as the Homeowners Mortgage Support Scheme, which was announced by the Prime Minister on 3 December, and the Working Capital Scheme announced by my noble friend Lord Mandelson on 14 January.
	Before turning to Amendment 174, let me say that I appreciate the concern that the scope of the powers to grant financial assistance could be too broad. Moreover, I can see why the noble Baroness, Lady Noakes, thinks there should be an explicit link to objectives such as financial stability or market confidence. However, let me assure your Lordships that the powers to provide financial assistance—though they look broad on the face of the Bill—will always be subject to rigorous tests and safeguards. Any Government would want to subject the giving of financial assistance to the most careful scrutiny for value for money and affordability and it will always be necessary to comply with obligations in Community law, which restrict the giving of state aid.
	I turn now to the additional safeguards proposed in the noble Baroness's amendments. I am concerned that Amendment 174, which seeks to link the provision of financial assistance for purposes not connected with the special resolution regime to objectives similar to those of that regime, could prove unduly restrictive in a way that she might not have intended. The amendment would seem to rule out precisely the kind of scheme the Government's amendments I have just mentioned would allow. For example, we could not operate the Homeowners Mortgage Support Scheme. This scheme will encourage lenders to enable ordinary hard-working households that experience a redundancy or significant loss of income to reduce their monthly payments to a more manageable level, by deferring a proportion of the interest payments on their mortgage for up to two years. I hope the noble Baroness would agree that it is desirable, but I am not sure we could argue that the scheme passed any of the three tests put forward in her amendment. For one thing, homeowners are not, in that capacity, depositors.
	Equally, we could not run the Working Capital Scheme announced by my noble friend Lord Mandelson. This scheme would tackle the current constraints on bank credit available for lending to ordinary-risk businesses with a turnover of up to £500 million per annum. The noble Baroness's friends in this House welcomed the scheme.
	I am also not sure that we could say that the scheme was necessary by reference to the stability of financial systems, the maintenance of public confidence in the stability of banking systems or for the protection of depositors. I am sure that we could develop other examples, but the real point is that it may be difficult to justify an individual scheme against the criteria proposed in the amendment. However, the scheme may be highly desirable when seen against the background of other schemes or initiatives. The whole can be greater than the sum of its parts.
	Amendment 174 would diminish the flexibility available in devising and implementing schemes. It could constrain our ability to deal with future crises—including crises where the three objectives set out in the amendment were at issue.
	Amendments 173F and 174AA would introduce a sunset provision into the financial assistance clause. We can debate the merits of sunset provisions in general when we discuss Amendment 208 tabled by the noble Lords, Lord Newby and Lord Oakeshott, so I shall confine my remarks to the implications of these amendments. They would mean that the extended definition of financial assistance, introduced by government Amendment 173E, would last for only two years after Royal Assent. As I have just explained, government Amendments 173A to 173E will put the provision of financial assistance by government departments to bank customers rather than to banks themselves on a proper footing.
	The effect of the amendments would therefore be that expenditure under schemes covered by the extended definition of financial assistance could not be incurred after two years after Royal Assent. If the schemes are guarantee schemes—and both the Homeowners Mortgage Support Scheme and the Working Capital Schemes are—they might never really get off the ground.
	Expenditure is not incurred when a guarantee is given but when it is called, so the guarantees on the scheme could only be given for defaults in the two-year period that occurred before February 2011. It would not be long before giving such guarantees would be almost pointless.
	More generally, I am, of course, delighted that the noble Baroness, Lady Noakes, has such confidence in the Government's plans for tackling the current crisis that she thinks it will be over in less than two years. We certainly expect our measures to bear some fruit in that time, but it would be wrong to assume that all these measures could be discontinued in a fixed, short period such as two years.
	As I said, some measures may necessarily require expenditure after two years even if they are closed to new entrants in that time. Others may need to run for longer periods in any case. So fixing a time limit now would simply be an unnecessary hostage to fortune.
	Government Amendments 174A and 174B address a different issue regarding the provision of financial assistance. As your Lordships will know, the Treasury has arranged to support the UK banking sector. These arrangements include the Credit Guarantee Scheme for new interbank lending introduced in October 2008, and the Asset Protection Scheme and the guarantee scheme for asset-based securities, announced on Monday 19 January. These schemes involve the provision of guarantees or similar financial commitments by the Treasury. Of course we hope that there will be no need to make payments in respect of any of these commitments, but clearly the Treasury must be in a position to settle promptly any liabilities that arise under the schemes.
	Normally, this would be effected by securing parliamentary approval for an estimate. However, the expenditure might be needed at any time, including during a recess when estimates could not be obtained. Also, it would be very damaging for confidence—and lead to all sorts of unhelpful speculation—if the Treasury were to seek an estimate including estimated amounts of money to cover the expenditure just in case any liabilities arose under these schemes. Amendments 174A and 174B address this issue by proving for direct access to the consolidated fund, without an estimate in cases where the funds are required urgently, and providing for parliamentary reporting with suitable safeguards for commercial confidentiality and for maintaining market confidence.
	Amendment 174C would have the effect of making adjustments to the definition of "a financial institution" subject to the draft affirmative rather than to the negative procedure. I recognise the point that there ought to be parliamentary scrutiny of important changes to the scope of a scheme to provide financial assistance, but I am not convinced that the affirmative procedure would be necessary or appropriate in this case.
	The power in Clause 227 is to provide clarity and certainty in the difficult cases that may arise at the margins of the definition of "a financial institution". It is not intended to be—and indeed could not be—used to make something that was not properly a financial institution into a financial institution for the purposes of Clauses 225 or 226. The power is therefore likely to be needed in cases where genuine doubt has arisen about the status of a particular institution. We may have to move quickly in those cases to dispel that uncertainty. We could not be confident of doing that with the affirmative procedure where debates in Parliament would be required. Of course, Parliament would still be able to call a debate on any order made under this clause to hold the Treasury to account on any change to the definition of "a financial institution" that it makes.
	I hope that the noble Baroness, Lady Noakes, will agree not to move her amendments and I beg to move my amendment.

Baroness Noakes: I have tabled Amendments 173F and 174AA as amendments to the Government's Amendments 173E and 174A, as the Minister has explained. I also have Amendments 174 and 174C in this group. In addition to speaking to my amendments, I shall be raising some questions on the amendments to which the Minister has just spoken.
	The Minister's Amendment 173C allows an unspecified Secretary of State to give financial assistance in the extraordinarily wide terms now allowed by new subsection (1A), introduced by Amendment 173E. Presumably, this covers all Secretaries of State, so the power is very wide indeed. More broadly, it is conventional for the Government to seek specific statutory cover for expenditure rather than rely on the Appropriation Act. To that extent, both Clause 225 and the government amendments are in line with that expectation. What is not expected is that the statutory power should be taken in a wholly unconstrained way, which is what the clause allows, particularly after the Government's amendments.
	In another place there was a discussion about whether Clause 225 should be restricted to some kind of financial stability context. Expenditure in paragraph (a) of subsection (1) is so constrained because of the references to Parts 1 to 3 of the Bill but neither paragraph (b) nor paragraph (c) has any words restricting it. My Amendment 174, which was tabled before the Minister tabled his later amendments, sought to limit the use of those powers in paragraphs (b) and (c) on the same basis as the Bank of England would use its stabilisation powers as set out in Clause 8. In relation to the use of these powers the Minister said to the Public Bill Committee in another place:
	"Obviously there has to be a systemic risk".—[Official Report, Commons, 30/10/08; col. 209.]
	The Bill does not say this and I believe that the Minister has given a description this evening in his introduction which runs counter to the assurance given in another place. I ask the Minister to address this point specifically in his response. Is he saying that what the Minister said to the Committee in another place now no longer holds?
	The Council of Mortgage Lenders has expressed concerns about the workability of the homeowner mortgage support scheme that the Government intend to use this new broad power for, to give financial assistance. The CML believes that there should be proper parliamentary scrutiny for the scheme, accompanied by a proper regulatory impact statement. This will not happen if this clause is used to legitimise that scheme. In effect, the Treasury will do whatever it wants to do, completely outwith the scrutiny of Parliament. We can see that in these difficult times the Government may need to bring forward various schemes which are designed to support individuals and businesses. We are not sure that the Bill is the right place for this, but on balance we accept that the public interest is served by ensuring that the schemes that the Government have recently announced are put on a proper footing to proceed.
	Accordingly we do not seek to oppose Amendments 173E and 174A, but my Amendments 173F and 174AA, as the Minister explained, seek to limit their use to two years. This is very limited sunsetting and not like the general sunsetting of this Bill to which the Minister referred, which we do not support. The two years mentioned in my amendments are intended to allow the Government to do whatever is necessary and give enough time for more specific statutory authorities to be put in place if, for any reason, expenditure needs to continue on a more permanent footing. The Minister gave an example of potentially needing to continue payments outside a two-year period. We understand that it would be appropriate to have the power now but a more specific version of the power should be placed in an appropriate statute if there were a long-term requirement for expenditure, rather than seeking to hide it within something which was originally designed for financial stability and systemic risk.
	We also have a concern with one aspect of Amendment 174B. We obviously have no problem with allowing for emergency access to the Consolidated Fund but we firmly believe in transparency and parliamentary accountability and we were genuinely astonished at the contents of new subsection (6) to Clause 225, which seems to allow the Treasury to completely dispense with a notification to Parliament if the Consolidated Fund is raided under Clause 225. Can the Minister say whether there is any precedent for this power to keep Parliament in the dark on a permanent basis? I could not recall one.
	Amendment 174C is slightly different. The power in Clause 225 refers to giving financial assistance to a bank or other financial institution and Clause 227 allows the Treasury to say what is or is not a financial institution. There is no apparent requirement for the institution treated as a financial institution to have any connection with finance or banking. Can the Minister say whether the Treasury could use Clause 227 to specify, say, that Jaguar Land Rover or Corus was a financial institution in order to give it some financial assistance? Indeed, can the Minister say what an "institution" is? Its use in statute appears to be confined to charities, higher education and criminal justice, apart from uses in connection with "financial institution" or "credit institution", and it does not appear to have been used hitherto as synonymous with "person", which is what one might have expected.
	My Amendment 174C concentrates on parliamentary procedure and says that the order-making power should be subject to the affirmative procedure if this power in Clause 227 is capable of designating almost any kind of organisation as a financial institution. That is an extremely wide power and emphasises how very broad Clause 225 could be made. For that reason we wish to seek the affirmative procedure as opposed to the negative procedure in relation to any relevant order made under Clause 227.

Lord Newby: These are pretty wide-ranging powers which masquerade under extremely bland parliamentary drafting. At first sight, apart from it being difficult to understand what the government amendments are getting at, you would not gather that the homeowner mortgage support scheme, for example, would be covered by these powers. They raise a general issue with which we have been grappling: the need for the Government to move quickly to deal with exceptional circumstances, and the need for adequate parliamentary scrutiny. As the Committee will know, sympathy on these Benches has, broadly speaking, been with the Government. I am not saying that we are departing completely from that on these amendments, but the noble Baroness has raised a number of issues on which we await the Government's response.
	The concerns raised by the Council of Mortgage Lenders about what happens next, the extent to which consultation will take place, what further scrutiny there will be of the homeowner mortgage support scheme and whether it will have a sunset clause demonstrate the general point that these are significant powers which, unless the Government take the situation seriously, can be exercised almost in secret. Unsurprisingly, given our later amendment, I have some sympathy with the noble Baroness's proposal for a two-year sunset clause. However, the thought of having a two-year sunset clause on one small bit of the Bill demonstrates why you need either a sunset clause for the whole Bill or no sunset at all. In reality, it is difficult for a Government to bring forward a Bill amending just one aspect of what we have here.
	I have considerable sympathy with the comments of the noble Baroness on proposed new subsection (6) in Amendment 174B. The Treasury might well think it necessary on public interest grounds to keep quiet about a whole raft of things that the public would legitimately feel that they had a right to know. Can the Minister explain the circumstances in which he envisages that being required? Equally, can he explain why the Treasury is resisting Amendment 174C on affirmative resolution? During the passage of the Banking (Special Provisions) Act 2008, we supported the need for speed in nationalising a failing bank. However, the kind of schemes that we are talking about here do not have the same kind of urgency. The homeowner mortgage support scheme is announced and must then be worked up. It almost certainly could not be legislated for at quite the same speed—and almost certainly would not need to be—as a bank that was suddenly collapsing. We will listen carefully to what the Minister said on that amendment.

Lord Higgins: These are remarkable powers. It is quite difficult to comprehend at first sight exactly what is involved, although the Minister helpfully tried at the beginning to set out how the procedure for making such moneys available is carried out.
	However, if I understand the Minister correctly, it is proposed that the normal estimates and Appropriation Act procedure should be abandoned completely. It appears from Amendment 174B that the Government have that in mind. In those circumstances, I am not clear how Parliament can exert control. It would be helpful if the Minister spelt that out in general terms.
	Proposed new subsection (5) in Amendment 174B gives me particular concern, saying that where money is paid out,
	"the Treasury shall as soon as is reasonably practicable lay a report before Parliament specifying the amount paid (but not the identity of the institution to or in respect of which it is paid)".
	All this will have happened without any parliamentary control at all. I am not clear on what the justification for that could conceivably be.
	Another thing, among many, that I am not clear on is the situation for the giving of guarantees, and when they are likely to be called. Again, is there to be any parliamentary control at all, either on the giving of the guarantees or on the releasing of money under them?

Lord Myners: I can confirm that "the Secretary of State" covers all Secretaries of State; that is normal. The individual Secretary of State who uses the powers under Clause 225 will be accountable to Parliament.
	The noble Baroness, Lady Noakes, mentioned some words used in the other place with reference to "systemic risk". The problem is that the noble Baroness's amendments limit the systemic risk to the banking and financial system. The government amendments are intended to allow schemes with wider scope, so as to avoid vicious circles of banks damaging the economy and, in turn, damaging banks.

Baroness Noakes: I understand what the Minister says, but can he confirm that his colleague discussing this in Committee in another place intended that the powers as then drafted were to be used only in the context of financial systemic risk, and that they were not then conceived for any other purpose?

Lord Myners: I am not in a position to know what was in the mind of my colleague in the other place when he made that remark. I can, however, help the Committee by explaining the situation as I see it. There is a linkage between the financial system and what the media occasionally call "the real economy". To regard the two as entirely dislocated from each other is to pose the risk of increased systemic risk. Although it would be wrong for me to put words into the mouth of my colleague in another place, that linkage between the financial system and non-financial institutions, the non-financial part of the economy, was entirely consistent with addressing a systemic risk to the financial system. In that respect, there is consistency between what I have said and what my honourable friend in the other place said.
	The noble Baroness raised the definition of "institution". "Institution" would clearly not include manufacturing companies.
	Questions were raised about the comments of the Council of Mortgage Lenders. I welcome the comments of the noble Baroness on public-interest considerations, which I am sure will be appreciated by those who will benefit from the Homeowners Mortgage Support Scheme. She asked about parliamentary scrutiny and the impact assessment. Parliamentary scrutiny of the Homeowners Mortgage Support Scheme will take a range of forms: adjournment debates, parliamentary Questions and ministerial correspondence. An impact assessment will be published once negotiations with the lenders have concluded. Until the scheme's design is finalised, we cannot publish an assessment of costs and benefits, but will do so at the appropriate time.
	The noble Baroness also raised questions about—

Baroness Noakes: I had not realised that the Minister was going to move on so swiftly from institutions. He said that an institution could not be somebody in the manufacturing sector. I asked him what could and could not be in the term "financial institution", and he said what could not. What would and could be included in the term?

Lord Myners: I am happy to come to that in a moment but should like to carry on addressing the comments the noble Baroness made on proposed subsection (6) in Amendment 174B. I was asked whether I was aware of any precedent for the removal of the requirement to report to Parliament. I am not aware of any direct precedent. The key issue here is to avoid systemic risk. The noble Baroness has tabled an amendment on transparency and I will return to this issue in that debate.
	The noble Lord, Lord Newby, expressed sympathy with much of what the Government are doing in helping businesses, people and homeowners as a result of the consequences of the global credit crisis. For that, I express the Government's appreciation. I believe that I have answered the questions on proposed subsection (6) of Amendment 174B.
	The noble Lord, Lord Higgins, asked a number of questions, but I am afraid that I missed the penultimate one. If he can remember the order in which he asked the questions and is kind enough to help me, I will endeavour to answer him. Following that, he asked about parliamentary control of the giving of guarantees. I have already addressed that question in respect of the comments made by the Council of Mortgage Lenders on parliamentary accountability.
	I will endeavour to be even more helpful to the noble Baroness on the term "financial institutions". This provision allows the Treasury to inject clarity at the edges where there may be some doubt as to whether a particular institution is a financial institution. It would not allow the Treasury to specify something as a financial institution when clearly it is not. For example, it could not specify Jaguar Land Rover or Corus Steel as financial institutions. Yet the hybrid nature of many financial institutions and the ever-present sense of innovation in the financial services sector may give rise to doubts as to whether an institution qualifies as a financial institution. Accordingly, the Government believe it appropriate to have such powers to make judgments on definition.
	I can see that the noble Lord, Lord Higgins, is ready to remind me of his unanswered question.

Lord Higgins: I am grateful to the noble Lord. I do not think he has covered my initial question. Are we totally abandoning the traditional form of approval of expenditure when the sums involved are likely to be large? One can see the need for urgency in certain circumstances. but if the House of Commons is sitting I am not clear why it would not be possible to deal with this as a matter of great urgency in 24 or 48 hours. This would of course be totally without precedent. The problem arises when the House is not sitting. With the kind of sums likely to be involved if we are dealing with systemic risk, there would be a strong argument for recalling Parliament.
	The clauses effectively overrule all the traditional ways in which Parliament and our democratic system keep control of expenditure. It would seem from Amendment 174B that the Treasury simply decides that the expenditure is needed and says it is too urgent for Parliament to exercise any control—even after the event. That would clearly be a stable door and horse-bolting situation. None the less, to include a provision for the matter coming before Parliament the moment it has occurred would be desirable.
	The question which the noble Lord did not realise I asked is on Amendment 174B. It says,
	"the Treasury shall as soon as is reasonably practicable lay a report before Parliament specifying the amount paid (but not the identity of the institution to or in respect of which it is paid)".
	I do not see why that is the case. It is extraordinary that not only is there no apparent control in the event but, when the report has been submitted, it need not specify to whom or in respect of what the amount has been paid. That is an incredibly wide-ranging provision. I do not see the need for it.

Lord Turnbull: Like the noble Lord, Lord Higgins, I do not understand why, if something is urgent under proposed subsection (4) of Amendment 174, it then also has to have anonymity under proposed subsection (5). There may be circumstances in which anonymity, secrecy or delayed release of the information is justified but it should not apply in every case in which the urgency condition has been invoked.

Lord Myners: The noble Lords, Lord Higgins and Lord Turnbull, have raised important questions about anonymity. I intend to take those points away and discuss them with officials to see if we might qualify any need for anonymity.

Lord Higgins: Are we totally abandoning the normal estimates and Appropriation Act procedure as far anything deemed by the Treasury as urgent is concerned?

Lord Myners: In recognising that these are measures which may be required in an emergency, in which financial stability is at risk and important measures need to be taken to stabilise the economy and the financial system, we are setting out appropriate measures which are suited to respond in the way that urgency requires.

Baroness Noakes: I want to place on the record that I am extremely disappointed with the Government's attitude in relation to these amendments. By their own admission, some of the powers that they are taking are unprecedented. The Minister has agreed to take away and look again at the tiniest part of his amendments. If the amendments are agreed, we, for our part, do not accept their full effect. I explained that we could understand why, given the current economic circumstances in the country, certain powers might need to be taken, but our approval of the amendments today should not be taken as an indication that we do not wish to pursue further the issues that I have already raised with the Minister and to which he has not responded satisfactorily. We will return to these matters on Report.
	Amendment 173A agreed.
	Amendments 173B to 173D
	 Moved by Lord Myners
	173B: Clause 225, page 110, line 33, at beginning insert "by the Treasury"
	173C: Clause 225, page 110, line 34, at beginning insert "by the Treasury, or by the Secretary of State with the consent of the Treasury,"
	173D: Clause 225, page 110, line 37, at beginning insert "by the Treasury"
	Amendments 173B to 173D agreed.
	Amendment 173E
	 Moved by Lord Myners
	173E: Clause 225, page 110, line 37, at end insert—
	"(1A) For the purpose of subsection (1)(b) expenditure is incurred in respect of financial assistance in respect of banks or other financial institutions if it is incurred in respect of an activity, transaction or arrangement, or class of activity, transaction or arrangement, which is expected to facilitate any part of the business of one or more banks or other financial institutions; and for that purpose it does not matter—
	(a) whether or not that is the sole or principal expected effect of the activity, transaction or arrangement, or
	(b) whether the sole or principal motive for the activity, transaction or arrangement is (i) its effect on banks or other financial institutions, (ii) its effect on the economy as a whole, (iii) its effect on a particular industry or sector of the economy, or (iv) its effect on actual or potential customers of banks or other financial institutions."
	Amendment 173F (to Amendment 173E) not moved.
	Amendment 173E agreed.
	Amendment 174 not moved.
	Amendment 174A
	 Moved by Lord Myners
	174A: Clause 225, page 110, line 38, at end insert "(and an order under that section may restrict or expand the effect of subsection (1A))."
	Amendment 174AA (to Amendment 174A) not moved.
	Amendment 174A agreed.
	Amendment 174B
	 Moved by Lord Myners
	174B: Clause 225, page 111, line 3, at end insert—
	"(4) Expenditure which could be paid out of money provided by Parliament under subsection (1) shall be charged on and paid out of the Consolidated Fund if the Treasury are satisfied that the need for the expenditure is too urgent to permit arrangements to be made for the provision of money by Parliament.
	(5) Where money is paid in reliance on subsection (4) the Treasury shall as soon as is reasonably practicable lay a report before Parliament specifying the amount paid (but not the identity of the institution to or in respect of which it is paid).
	(6) If the Treasury think it necessary on public interest grounds, they may delay or dispense with a report under subsection (5)."
	Amendment 174B agreed.
	Clause 225, as amended, agreed.
	Clause 226 agreed.
	Amendment 174BA
	 Moved by Baroness Noakes
	174BA: After Clause 226, insert the following new Clause—
	"Transparency: report to Parliament on financial assistance
	(1) The Treasury shall prepare and lay before each House of Parliament a monthly report in respect of—
	(a) financial assistance paid out under subsection (1) of section 225,
	(b) loans made under section 226,
	(c) guarantees, indemnities or similar arrangements which may result in amounts being paid out under subsection (1) of section 225.
	(2) A report for a month shall show the transactions entered into under each of paragraphs (a) to (c) of subsection (1) during that month together with the totals made or outstanding as at the end of the month.
	(3) The reference in subsection (2) to totals made or outstanding means—
	(a) in relation to loans, the amount of principal and accrued interest which has not been repaid,
	(b) in relation to guarantees, the gross amounts of the guarantees, indemnities or similar arrangements which might be payable,
	(c) in any other case, the amount paid or committed on a cumulative basis.
	(4) The Treasury shall ensure that the report contains sufficient detail to enable Parliament to understand the actual and potential commitment of public money to financial assistance and the Treasury may summarise the individual items which fall to be disclosed in a report in whatever way they consider appropriate in order to assist Parliament in that regard.
	(5) If the Treasury consider that certain information should not be disclosed in a report on public interest grounds, a report—
	(a) may omit that information until such time as the Treasury consider that the public interest is no longer affected, and
	(b) must contain a statement that the Treasury has not disclosed information in accordance with this subsection.
	(6) A report shall not be required for any month in respect of which there have been no material changes since the last report made under this section."

Baroness Noakes: This amendment introduces a new clause after Clause 226. The new clause is about giving information to Parliament about financial assistance provided for under Clauses 225 and 226.
	We have debated transparency on several occasions during this Committee, and I raised the issue of disclosure about banks taken into public ownership and disclosure about what UK Financial Investments is doing. I can say only that recent events have made those issues even more important, and I shall return to them on Report.
	Amendment 174BA deals with another aspect of transparency; namely, transparency about the amounts paid out under the financial assistance powers in Clause 225, which, as we have just seen, are now to be drafted on a very much more extensive basis than was considered in another place. We have had bank rescue package No. 1 and now bank rescue package No. 2. We have had the Mandelson small firms loans package, which will be dealt with under Clause 225, as well as the homeowner support scheme. We do not know what else may end up being done under the cover of this extremely wide power in Clause 225 as amended.
	My amendment simply asks for a monthly report on the amounts spent or lent under Clauses 225 and 226, and a balance sheet at the end of each month. I recognise that monthly reporting can be onerous but the plain fact is that things are moving so fast at present that Parliament needs to keep track of what is happening, and monthly seems to be a reasonable frequency. So that this does not become an onerous requirement on a long-term basis, subsection (6) of my proposed new clause does not require a report if there have been no material changes since the previous report.
	The Minister will doubtless tell me about existing processes for accountability to Parliament. I do not dispute that there are some such processes but they are not predicated on urgent and frequent action on an unprecedented scale. We live in unusual times and may need to take unusual actions. That is how the Government have been justifying their unusual actions, but they have not accompanied them with proper accountability to Parliament to reflect the unusual nature of the things that they are doing.
	My intention is that the report will capture all the amounts paid or payable under the various bank rescue packages and other schemes now being announced. Perhaps the Minister will say whether all the Government's financial assistance payments for the current crisis will be made under the authority of Clauses 225 and 226. For example, under what authority was the £37 billion paid out in the first bank rescue package? My clause would not cover those payments or commitments and it may need to be modified to that extent. I hope that the Government will not resist a further, indeed modest, amount of parliamentary scrutiny. I beg to move.

Lord Newby: The noble Baroness raises a very important point, although I am not sure that monthly accounting is absolutely the right way forward. However, I believe that the Treasury Select Committee in another place has asked the Government to produce timely information and to consolidate information about the financial consequences of all the various packages and initiatives that we have had over the past six months. I think that that would be to the benefit of Parliament, and no doubt to the benefit of the Government, if they were able to do so. Can the Minister tell us what the Government plan to do in response to that request and whether, in view of the exceptional circumstances in which we now find ourselves, the normal, rather staid principles of parliamentary accounting can be supplemented by additional, more periodic, statements, even if they do not go quite as far as the noble Baroness wishes?

Lord Higgins: I support my noble friend's amendment, which seems to be virtually the minimum that one might reasonably ask for. The trouble is that, even in advance of Royal Assent being given to the Bill, at the moment it is terribly difficult to get any comprehensive idea of what amounts the Government have committed, whether by way of direct financial assistance or guarantees. In advance of the amendment, or something like it, being accepted, is there not a case for the Government to take action to report regularly to Parliament so that we have a running tally of what is happening following successive proposals by the Government? At the moment, it is extremely difficult to get any idea at all of the orders of magnitude involved.

Lord Myners: I recognise the important point that the noble Baroness makes, and I assure her that the Government take transparency and openness very seriously. Indeed, government Amendment 174B already requires the Treasury to report to Parliament when the Consolidated Fund is accessed directly under the emergency procedure that I explained a short while ago. The noble Baroness's amendment would go further in providing for regular reporting of financial assistance given under Clause 225, whether or not the emergency procedure was used, and of loans from the National Loans Fund made under Clause 226.
	However, there may be some difficulties with what the noble Baroness proposes. Some thought may need to be given to whether the Treasury should report on other departments' schemes. There is also the danger—it is always a danger with provisions of this kind—that prescribing too many detailed requirements will produce an unhelpful straitjacket which limits the usefulness of the reports produced.
	The noble Baroness asked about the authority under which the subscription of £37 billion in bank capital was made. This was made under Clause 225. It is possible for departments to incur expenditure as long as the provisions providing authority have received a Second Reading. The noble Lord, Lord Higgins, asked about reporting on what has already been done, and may well be done in the future. I understand the concerns raised and I will take it away as I should like to look further into the subject and return to it on Report. I hope that that will satisfy the noble Baroness and that she will feel able to withdraw the amendment.

Baroness Noakes: I am grateful to the Minister. It will be extremely constructive if he looks at the issue before Report and returns with an amendment that meets the spirit in which he is taking it away and the spirit with which it was tabled.
	The noble Lord, Lord Newby, rightly raised the Treasury Select Committee report that came out late last week and which focused on the need to keep track in particular of these open-ended commitments that are being entered into. That was an element of the report specified in my amendment. I hope that the Minister will focus not only on payments but on commitments. With that, I beg leave to withdraw the amendment.
	Amendment 174BA withdrawn.
	Clause 227 : "Financial Institution"
	Amendment 174C not moved.
	Clause 227 agreed.
	Amendment 174D
	 Moved by Lord Myners
	174D: After Clause 227, insert the following new Clause—
	"Investment banks: Definition
	(1) In this group of sections "investment bank" means an institution which satisfies the following conditions.
	(2) Condition 1 is that the institution has permission under Part 4 of the Financial Services and Markets Act 2000 to carry on the regulated activity of—
	(a) safeguarding and administering investments,
	(b) dealing in investments as principal, or
	(c) dealing in investments as agent.
	(3) Condition 2 is that the institution holds client assets.
	(4) In this group of sections "client assets" means assets which an institution has undertaken to hold for a client (whether or not on trust and whether or not the undertaking has been complied with).
	(5) Condition 3 is that the institution is incorporated in, or formed under the law of any part of, the United Kingdom.
	(6) The Treasury may by order—
	(a) provide that a specified class of institution is to be or not to be treated as an investment bank for the purpose of this group of sections;
	(b) provide that assets of a specified kind, or held in specified circumstances, are to be or not to be treated as client assets for the purpose of this group of sections;
	(c) amend a provision of this section in consequence of provision under paragraph (a) or (b)."

Lord Myners: The amendment inserts the first of four new clauses that will allow the Government to introduce regulations to bring about changes to the insolvency regime for investment banks in the UK. The Committee will have noted that this power will be exercised only if, after a review, such changes are deemed necessary. The remainder of the government amendments on this topic will be covered in the next debate.
	I turn first to the rationale for the Government's introduction of amendments relating to investment bank insolvency. The Committee may be aware that various issues have been raised by the administration of Lehman Brothers International (Europe). Essentially, these problems stem from the complex ways in which client money was held and used by that company while operating as a broker-dealer. This has caused delays in allowing the administrator to identify and return these funds to clients. There are fears that these problems have reduced market confidence in UK insolvency procedures. This has potential implications for the attractiveness of the UK, and the City of London in particular as a place to conduct prime brokerage business with potential knock-on consequences for UK competitiveness in general.
	In response to these concerns, the Government announced in the Pre-Budget Report that an in-depth review would be carried out by the Treasury to look at whether there are shortfalls with existing insolvency law regarding investment banks which hold client assets. This review will also consider whether any new legislation is needed. The review will focus on: whether the statutory purpose of administration as provided in the Insolvency Act, which requires administrators to act in the general interest of creditors as a whole, presents problems in the case of institutions which hold client assets; the procedure for an administration of a complex investment bank; and the treatment of client assets and arrangements for the continuity of brokerage accounts.
	If the review concludes that legislative changes are needed, the amendments that we are debating here today will allow the Government to make regulations to create a new insolvency regime for investment banks, either through specific modifications to general insolvency law, or to establish a stand-alone procedure for investment banks. The new powers will be set out in the four new clauses to the Bill. It should be noted that the review may find that no changes are necessary. Banking and insolvency law is highly complex. Developing an insolvency scheme where the emphasis lies on the return of client assets rather than simply on maximising the return for all creditors would be a significant departure from UK insolvency law, and such a move could have unpredictable consequences for the market. It may be that many of the problems relating to client assets and other issues are simply inherent in the large and complex trades in which investment banks engage.
	The Government will, as part of the review process and in conjunction with the tripartite authorities, explore whether there are alternative approaches available. For example, changes to regulatory rules as they apply to UK investment banks may be a more appropriate route to delivering better protection for client assets in the event of an investment bank becoming insolvent. Parliament will have the opportunity to scrutinise any changes that the Government may propose, as provided for explicitly in these amendments.
	I turn to the detail of the government amendments to be introduced in this group. The first new clause sets out the scope of the enabling power which will allow the Government to make regulations to change the insolvency regime for investment banks For this purpose, and for this purpose alone, we have needed to define which institutions are "investment banks". They are defined—again I highlight the fact that the definition is purely for the purposes of these new clauses relating to insolvency—as institutions incorporated or formed under UK law, having permissions under Part 4 of the Financial Services and Markets Act 2000 to carry on the regulated activities of safeguarding and administering investments, dealing in investments as principal, or dealing in investments as agent.
	Subsection (3) of the new clause provides that for the regulations to apply, the institution must be holding client assets when it becomes insolvent. It also provides that an order, subject to the affirmative procedure, may be made to alter the extent to which the definition captures a particular institution or class of institutions. Such an order could prevent the regulations from applying to an institution that would otherwise have been defined as an "investment bank"; for example, an institution whose investment business plays such a peripheral part to its main business that it would be counterproductive to apply the new insolvency regime. Or it could bring other institutions into the definition of investment bank, such as those institutions holding permission for a regulated activity not on the list set out in this new clause if the review concludes that this is necessary.
	The new clause will also provide for the Government to define—again by order subject to the draft affirmative procedure—that certain types and classes of assets held in certain circumstances, may or may not be treated as client assets for the purposes of the insolvency regime regulations. For example, the clause could allow those former client assets that had been rehypothecated to be classed as client assets for the purpose of the regulations if it is felt by the Government to be appropriate, after taking into account other factors such as the rights of general creditors. Noble Lords will appreciate that this level of flexibility is necessary as the appropriate scope of any changes to be made to the insolvency regime will become clear only when the review I alluded to earlier has been completed. I should also note that a subgroup of the expert liaison group has been set up to advise the Government on policy options in this area. It is made up of experts representing the most relevant industry areas that have a stake in this process.
	I am aware that amendments have been tabled to this amendment. It is my understanding that the amendments tabled by my noble friend Lord Williams of Elvel are intended to introduce a debate on the much wider public policy question of whether policy makers should insist on investment banking being split from commercial banking. He will correct me if I am wrong. It is the so-called Glass-Steagall issue, which is named after long-standing American legislation, now repealed, that had that effect. I believe that that is the intention of the amendment tabled by the noble Lords, Lord Newby and Lord Oakeshott, but I am sure that they will correct me if I am mistaken on this point. I understand that the final amendment in this group is more narrowly focused on the scope of my amendment, so our debate will cover that.
	While I look forward to a debate on the wider issue of whether investment banking should be split from commercial banking, I must remind my noble friend Lord Williams that the purpose of the definition of investment banks set out in this new clause is purely and exclusively to provide a definition for the purposes of the insolvency procedure enabling power in these new clauses. Therefore, any attempt to change the definition here would apply to investment banks in that regard only and would not address the wider questions that I believe are the intended purpose of his amendments.
	At this point, it may be appropriate for me to give way to my noble friend and other noble Lords who have tabled amendments to my amendment to enable them to speak to them.
	Amendment 174DZA had been retabled as Amendment 174DE.
	Amendment 174DA (to Amendment 174)
	 Moved by Lord Williams of Elvel
	174DA: After Clause 227, line 10, at end insert—
	"(d) underwriting the issue of securities, or
	(e) taking deposits for the purpose of the regulated activities."

Lord Williams of Elvel: It may be convenient for the Committee if I speak to the whole of the group rather than just to the initial amendment. My noble friend has been kind enough to say that I wish to raise a debate about the principle of investment banks and commercial banks, and he is right. In introducing this new definition of investment banks, he said that it was for the purposes of insolvency legislation only. Parliament is perfectly entitled to rewrite the definition and the basis on which it is intended.
	I would like my noble friend to address the problems that I addressed on Second Reading. First, it is very difficult to see how the taxpayer could compensate investment bankers who have been dabbling in securities. It is easy to see how we can compensate commercial banks—high-street banks—with taxpayers' money, but I find it difficult to see how the taxpayer could properly compensate people who have lost money dabbling in what I would call something of a casino. The recent takeover of Merrill Lynch by the Bank of America, in which Merrill Lynch exposed some extraordinary losses, has made that point.
	Secondly, although I do not want to repeat all that I said on Second Reading, I want to reiterate that commercial banking and investment banking involve different skills. I have been involved in both, and I know that. It may be time to get back to a bit of sense whereby commercial bankers say that they are commercial bankers who do not dabble in securities and investment bankers say that they run securities businesses and do not go on to the high street collecting deposits from the public.
	My amendments address the question of the definition of an investment bank. Amendment 174DA relates to underwriting securities, Amendment 174DB addresses foreign investment banks which may or may not be incorporated under UK law, and the other two amendments make it clear that a bank as defined under Clause 2 cannot wholly or partially own an investment bank, so that the two operations are completely separate.
	I recognise that my drafting is not perfect and that it would require time, effort and study to get from where we are now to where I would like to be. I therefore have a good deal of sympathy with Amendment 203, tabled by the noble Lord, Lord Newby, which requires a review after a period of time. However, if my noble friend is saying, as he did on Second Reading, that the Bill is meant to be a permanent Act for the regulation of the banking industry—and I do not think that we will get another Banking Bill for a few years—then it needs to include a provision to enshrine the principle that investment banks and commercial banks are different animals. We should make provision to that effect.

Lord Newby: The Minister is right that the amendment tabled by my noble friend Lord Oakeshott and me is designed to raise a broader public policy debate about bank regulation. It covers not just banks covered by the Bill but the entire banking system. A number of things have become clear during the banking crisis: there was mismanagement of the banks; many bankers were grossly over-rewarded; and those bankers had no sense of the broader community around them. We know all those statements to be true because the noble Lord, Lord Myners, made them in his interview at the weekend.
	We know that there have been major regulatory failures; we saw it in relation to Northern Rock and we have seen it now more generally. Banks were behaving recklessly; their accounts were almost meaningless because they were propped up by toxic assets and the FSA was not on top of it. As I understand it, in regulating the banks the FSA divides itself into wholesale and retail divisions, and Barclays has to date been regulated by the retail bit of the FSA, despite the fact that the major risks facing Barclays come from the wholesale banking side of the bank. I also understand that Standard Chartered is regulated entirely by the wholesale team, despite the fact that outside the UK it has major retail deposits.
	That demonstrates the failure of the current regulatory regime. There is now widespread recognition, including by the FSA and the Government, that there needs to be a fundament review of the regime and reform in the way that the banks are regulated. The current plans have a number of features. There is to be a review of remuneration and capital adequacy rules, and we are moving into an interesting phase in which there is a sort of planning agreement—I am sure that the Government would not want to use that phrase; they are calling it a lending agreement—under which the Government will provide support for the banks in various ways if they can reach an agreement on the quantity and type of lending made available across the country.
	In the spring, the Government will publish proposals for the regulatory framework of the banks, together with the FSA's review. My Amendment 203 suggests a direction under which that regulatory framework might operate. It takes as its starting point the fact that banks, at least in terms of their deposit-taking activities, are de facto utilities. That is the clear implication of the lending agreement framework, and of the other steps that the Government have taken. Further action may be required to keep the sector afloat. This means that the banks cannot be treated like any other enterprise.
	Despite all the talk during the passage of the Bill of arm's-length dealings with the banks, the Government are now intervening in the core business strategies even of those banks in which they do not yet have a shareholding. The proposal in Amendment 203 is that the Government contemplate separating investment banking from deposit-taking, either entirely or in a clearly segmented holding company. Such a move—in the spirit of, but not exactly replicating, the Glass-Steagall Act—would insulate the element of a bank's activity that most affects individuals and overall bank stability from the more risky practices engaged in by investment banks.
	This proposal has wide support from a range of commentators and from the OECD, which a couple of weeks ago in its twice-yearly review on trends in financial markets said that, as a result of regulatory and governance failures, inherently risky investment banking businesses had been able to raise capital too cheaply, leading to a build-up in debt that contributed to the current financial crisis. The OECD said:
	"These businesses benefited from a too low cost of capital and, commensurately, they became too large ... as a consequence. When embedded inside a financial conglomerate like Citi or a European universal bank like UBS, excessively large investment bank segments put those entire institutions at risk".
	There are two approaches that one could adopt. One is advocated by the noble Lord, Lord Williams. The other is to allow deposit-taking and investment banking to be undertaken by a single holding company, but as separate legal entities. I have no preference between the two. In either case, with a clear segregated structure, it would be much easier to have the appropriate level of regulatory regime for each type of banking activity.
	There are a number of arguments against it. The bankers argue that it is extremely complicated and costly and puts the clock back. In one sense, that is exactly what it seeks to do. Some people argue that it would be costly to consumers because, in the past, investment banking profits have subsidised the retail banking side. That is fine when the flow goes in that direction. However, when the investment banking side collapses, as it has, the argument no longer applies. It certainly does not apply at the moment. It is also argued that it goes against what is happening with some banks in the US, where Merrill Lynch has been taken over by Bank of America, and Bear Stearns by JP Morgan. However, Citigroup moved in the opposite direction just last week when it in effect adopted the proposal of the noble Lord, Lord Williams, and split the investment and deposit-taking sides of its activities.
	None of these arguments undermines my basic premise. Greed, vanity and recklessness have brought the big UK clearers to their knees, in considerable measure through their over-risky investment banking activity. The Government are undertaking a review of the framework of the banking sector, and the amendment would require them to look at the case for separating investment banking from deposit-taking. I commend it to the Minister and to the Committee.

Baroness Noakes: Amendment 174DE is an old fashioned amendment compared with the debates we have just had, because it is an amendment to the Government's amendment. I propose the deletion of subsection (6) of the Minister's new clause, introduced by Amendment 174D, which gives the Treasury the broad power to say what an investment bank is and what client assets are. However, if the Government cannot define what an investment bank and client assets are, they are not ready to bring forward a power of such magnitude. It requires Parliament to take too much on trust about the final outcome of the legislation. However, as I say, this is an old fashioned intervention.

Lord Northbrook: I rise to support the amendment of my noble friend Lady Noakes. Surely conditions 1, 2 and 3 in subsections (2), (3) and (5) of the proposed new clause are sufficient definition. I do not see why the Treasury needs this wider order, particularly in subsection (6)(a), to specify the class of institution to be treated or not treated as an investment bank.

Lord Myners: I have listened with interest to the amendments proposed by noble Lords. I start with those proposed by my noble friend Lord Williams of Elvel. I will set out why I believe that the scope of the investment bank insolvency regime regulations are best expressed by the Government's proposed new clause, without the changes proposed by my noble friend.
	The first amendment adds to the list of regulated permissions that an institution needs to have, under Part 4 of the FSMA 2000, in order to be defined as an investment bank for the purposes of the scope of this enabling power. I believe that the intention of the noble Lord was to ensure that the definition of "investment bank" included a sufficiently wide list of activities to capture all relevant institutions. However, I again remind noble Lords that this definition of investment bank only has a bearing on the scope of the regulations that could be made under the new enabling power to introduce a new insolvency regime for such institutions.
	I believe that the amendment I have tabled is more appropriate for two reasons. To be brought into the scope of the new insolvency regulation-making power, an institution must satisfy certain conditions. Condition 1 is predicated on the permissions for regulated activities under the FSMA, which are clearly defined and therefore unambiguous. The first activity featured in my noble friend's amendment,
	"underwriting the issue of securities",
	forms part of the regulated activity—
	"dealing in investments as principal"—
	included in condition 1, and is therefore already covered. The second activity,
	"taking deposits for the purposes of the regulated activities",
	is incidental to other regulated activities and does not need to be covered.
	Secondly, my amendment will include a provision under which the Government can change the scope of any regulations that may be introduced, subject to parliamentary approval. Again I remind the House that this flexibility is necessary, as the Government's review may identify other institutions that should or should not be subject to the regulations. I believe that this observation addresses the closing comments of the noble Baroness, Lady Noakes, on the definition of an investment bank. I will come to client assets in a moment.
	The second amendment tabled by my noble friend intends to expand the scope of the regulations. Again, I believe that the intention of the noble Lord was to ensure that the definition of "investment bank" was sufficiently wide. However, I again remind noble Lords that this definition of investment bank only has a bearing on the scope of the regulations that could be made under the new enabling power to introduce a new insolvency regime for such institutions. I believe that the effect of the noble Lord's amendments would be to expand the scope of the definition of investment banks to all entities that carry out such business in the UK, including UK branches of foreign investment banks, so that any new UK insolvency regulations would also apply to such institutions. It is not the Government's intention to provide for this.
	With regard to branches of EEA firms, under EC law the UK Government cannot interfere with the insolvency arrangements of an institution whose home state is not the UK. In relation to the branches of non-EEA firms, the Government do not wish to interfere with the arrangements that the home country may make to deal with an insolvent parent and that parent's UK branch. Members of the Committee should also note that the rest of the Banking Bill does not apply to UK branches of foreign banks for similar reasons.
	The last two amendments tabled by my noble friend Lord Williams seek to ensure that the definition of "investment bank" could not apply to an institution that also takes deposits within the meaning of Clause 2 or that has a deposit-taker as a parent. Again, I believe that my noble friend's intention was to spark a debate on whether investment banks should also be, or be associated with, regulated deposit-takers—commercial banks. However, I remind the Committee that this definition of "investment banks" only has a bearing on the scope of the regulations that could be made to introduce a new insolvency regime for such institutions. As such, the effect of my noble friend's amendments would be to prevent the insolvency regime regulations applying to an investment bank that was also, or associated with, a deposit-taker.

Lord Williams of Elvel: Does my noble friend have no view at all on the principle that I have expressed?

Lord Myners: I assure my noble friend that not only do I have a view but I expressed it at Second Reading and will do so again in a moment, if he would have some patience. The Government believe that the scope of the regulations should be able to coexist with other insolvency procedures that might be applied to a deposit-taker—for example, the bank insolvency procedure—and that institutions holding a permission under the FSMA to accept deposits should not be automatically excluded from the scope of the new insolvency regime.
	There are of course considerations to be made as to how any special insolvency regime for investment banks would fit alongside such schemes as the bank insolvency procedure under Part 2. But the regulation-making power in government Amendment 174F will allow us to make provision as to how such schemes will work together. In short, the Government believe that this flexibility should be retained for the enabling power, as an investment bank could also have a deposit-taking business. Indeed, several such banks are in existence. If the review recommends that the new insolvency regulation should be drawn up for the insolvency of investment banks, it is likely that we would want to bring such institutions into their scope.
	Having discussed my noble friend's amendments and the specific effect that they would have on the Government's intended policy in this area, I will now return to the wider debate on the so-called Glass-Steagall issue. The question is whether there is a case for splitting the business of banking between its utility functions, such as deposit-taking on one side, and its more speculative investment functions, which could be loosely referred to as investment banking, on the other.
	Amendment 203, tabled by the noble Lord, Lord Newby, proposes a new clause that would require the Government to produce a report that examines this question and to report within the year. Members of the Committee will appreciate that this question is one part of the wider debate that policy-makers around the world are having on an ongoing basis on the appropriate form that financial service providers, and particularly those institutions that act as intermediators of capital, should take in the future in the light of the financial instability that we have experienced throughout the world in recent months and years.
	I assure the House that the Government, along with their international partners, will consider the policy questions posed, along with many other questions and possible solutions related to the goal of reaching a more stable financial system. However, I do not believe that this goal is best served by requiring the Government to have a period of one year in which to respond on one specific point. I believe that this question is best addressed as part of the wider work I have just mentioned and that the timetables of any announcements should rightly depend on the progress made with the UK's international partners.
	The noble Lord, Lord Newby, suggested that the response of others to his amendment and those of my noble friend Lord Williams might be that we were putting the clock back or, perhaps I may suggest, trying to put the toothpaste back into the tube. The noble Lord, Lord Newby, pointed to Citibank, which appears to be splitting its utility function from its investment bank, although there was little specificity in its announcement and it is not entirely clear how far it would intend to go. But that is juxtaposed with the fact that the Bank of America has only recently concluded the acquisition of Merrill Lynch. Goldman Sachs and Morgan Stanley have gone the other way and have registered as bank holding companies, having previously been investment banks.
	The noble Lord, Lord Newby, mentioned the interview I gave to the Times, as reported on Saturday. As I have previously said in this House, there has been mismanagement of the investment banking arms of a number of our major banks, which, in part, is due to an absence of appropriate supervision and the consequences of asymmetrical incentive schemes. The FSA in its very forthright and honest response to the collapse of Northern Rock admitted to a number of shortcomings in its own regulatory engagement with that institution. The FSA's new chairman, the noble Lord, Lord Turner, is carrying out a fundamental review of regulation and the operation of the FSA.
	In parallel to that, we are in discussions with the G20 countries and the Financial Stability Forum to see what lessons can be learnt as a consequence of the failures that we have seen. Clearly, it would not be acceptable simply to say, "This has all been rather unfortunate, but let us put that behind us and move on". There is a clear need to recognise that we need a series of responses across intergovernmental bodies, regulation, supervision and institutional shareholder engagement.
	It is also worth pointing out that the investment banking arms of hybrid or diversified banking institutions were not only, as the noble Lord, Lord Newby, indicated, for some time apparently subsidising the commercial and retail banking arms—I say "apparently" because one has to say that possibly some of the profits that were reported were somewhat illusory or at least slipped away, although not always before large bonuses had been paid to those who claimed responsibility for generating those profits—but developed new methods of managing risk and pricing risk, which were of value to the banks' commercial and private retail customers. We simply somehow morphed into a situation in which these generally beneficial consequences of these larger organisations went to a situation where the investment bank became the dominant force within the organisation. International co-operation, improved regulation and, very importantly, improved supervision—including effectiveness of boards of directors and remuneration—and risk management processes are capable of offering significant progress.

Lord Eatwell: Does the Minister agree that my noble friend Lord Williams and the noble Lord, Lord Newby, might draw some comfort from the Group of Thirty report published last week, which suggested that there should be a separation of commercial banking and investment banking, particularly given that the committee which produced the report was chaired by Mr Paul Volcker, whose position in the new American Administration suggests that he will have a significant influence on the development of regulatory structures in the future?

Lord Myners: I am not familiar with the G30 report to which my noble friend Lord Eatwell refers but I shall certainly make sure that I study it as soon as I have an opportunity. I would not be surprised if the noble Lord, Lord Turner, considers in his review the issue of large organisations.

Lord Northbrook: Will the Minister prevail on the noble Lord, Lord Turner, to give us the benefit of his wisdom in the House? He has been making some very interesting speeches outside the House but we have not had the benefit of his counsel on these matters.

Lord Myners: Inasmuch as prevailing on the noble Lord, Lord Turner, is not seen as an intrusion on his independence, I shall seek to convey to him the fact that his appearance in the House will always be welcome and appreciated, particularly his contribution on matters relating to financial regulation. As I said, it is quite possible that he will include this in his report, but I wait to see whether that is the case.
	The noble Lord, Lord Newby, raised questions about the internal operation of the FSA in connection with the regulation of Barclays and Standard Chartered. I am afraid that I am not in a position to comment on that.
	The other amendments in the group relate more specifically to the scope of the amendment I propose. I appreciate noble Lords' concerns that the enabling power the Government are taking is wide and I note the concerns on this point expressed by the Delegated Powers Committee. I note the earlier observations of the noble Baroness, Lady Noakes, on the Delegated Powers Committee and I certainly would not wish to gain a reputation in the House for not taking that committee with the seriousness with which I know it is taken by other Members of the House.
	We appreciate that this is clearly not ideal. However, the Government would not have framed their amendment in the way that they have if they thought that it was avoidable. As I mentioned earlier, there is considerable market pressure for this issue to be looked into. There is a risk that important financial services activity such as prime brokerage may migrate to other jurisdictions which may be perceived to offer competitive advantages to counterparties in obtaining client assets speedily in an insolvency situation. I have received a number of representations on this point, as I believe have other Members of the House. A move of business away from the UK would weaken the UK institutions even further at this difficult time.
	The Government would have preferred to take more time over this issue but, given the risks that I have just outlined, they feel that it is necessary to move quickly. The review that we have announced will show the market that the Government are serious in looking into this issue, and the enabling power we intend to take will show the market that we have taken an adequate power to make changes in a relatively short time. Other options, such as conducting a review and following it with primary legislation, were considered. However, the lack of parliamentary time and the sheer length of time a Bill takes to become law militated against this approach.
	Again by acting quickly and by dealing with the issue in primary legislation, the Government have clearly signalled their intention to resolve the potential difficulties faced by the brokerage market in the UK. Bearing this in mind and given that, unavoidably, the review into the operations of UK insolvency law on investment banks has yet to happen, we risk taking powers with insufficient scope if we do not draft our enabling power widely. A narrow scoping power might allow the Government to make the changes they may need to make, but this fact might cause the market to have less confidence that the Government are serious about addressing this issue in a short timescale. Therefore I ask that noble Lords support the Government in taking this wider power.
	I can, however, commit to the House that we will further consider the noble Baroness's amendment and the report of the Delegated Powers Committee to assess whether there is a way in which the flexibility the Government require can be reconciled with a more limited and workable reduction in the scope of the power. We hope to be able to return to this issue on Report. For all these reasons, I hope that noble Lords will consider not pressing their amendments.

Lord Williams of Elvel: I beg leave to withdraw my amendment.
	Amendment 174DA (to Amendment 174D) withdrawn.
	Amendments 174DB to 174DE (to Amendment 174D) not moved.
	Amendment 174D agreed.
	House resumed. Committee to begin again not before 8.55 pm.

Criminal Justice and Police Act 2001 (Amendment) Order 2009

Statutory Instrument

Motion to Approve

Moved By Lord Bach
	That the draft order laid before the House on 20 January be approved. Relevant Document: 3rd Report from the Joint Committee on Statutory Instruments.

Lord Bach: My Lords, the order seeks to add the offence of cannabis possession to the penalty notice for disorder scheme—the PND.
	The offence of cannabis possession was included in a previous draft order laid before Parliament on 15 December. In view of concerns raised over some of the offences listed in that order, we decided to withdraw it and to consult more widely on the new offences to be added to the scheme. However, as my right honourable friend the Home Secretary said, the penalty notice for disorder scheme will play an important part in the regime to deal with possession of cannabis and therefore I am bringing this new order before your Lordships' House.
	As part of the consultation with stakeholders on the introduction of PNDs for cannabis possession, the Association of Chief Police Officers and the Home Office have considered how the possession of cannabis should be policed as a class B drug. This led the Home Secretary to invite ACPO to bring forward formal proposals for an escalation approach. The approach proposed and jointly developed with ACPO consists of three steps: warning, PND and arrest. Penalty notice disposal provides the police with a quick and effective way of punishing minor nuisance offending by minimising the paperwork and the processing required from the police. Issuing a PND takes approximately 30 minutes compared with two-and-a-half hours to prepare an evidential case file. The cases do not have to be taken to court, which also relieves the burdens on the court.
	Cannabis is used in public far more commonly than other illicit drugs and is perceived to be linked with anti-social behaviour and public disorder, which penalty notices are specifically designed to address. Although cannabis warnings will continue to be available to the police, PNDs impose a financial penalty which cannabis warnings do not. They are therefore sanctions of a different order. The penalty amount for cannabis possession will be fixed at £80. We believe that the introduction of a PND will offer a proportionate response to a second possession offence as part of a strengthened escalation process of enforcement on the reclassification of cannabis to a class B drug, effective from today, 26 January. At the moment, in practice, a cannabis warning can be followed by another cannabis warning which can be followed by another cannabis warning.
	Subject to parliamentary approval of penalty notices for disorder for cannabis possession, the Association of Chief Police Officers will publish revised national guidance for the policing of cannabis possession as a class B drug in England and Wales. That will make it clear that while arrest is always the first option, an adult offender is likely to receive a cannabis warning for a first possession offence and a penalty notice for disorder for a second offence. A third offence will result in arrest and consideration of further action, including prosecution. Ultimately, decisions on the most appropriate disposal of an offender are made by the police and the CPS using their professional judgment and experience. However, I emphasise that that escalation will apply to possession-only offences.
	Officers will use their discretion to determine whether the amount of cannabis possessed appears reasonable for personal possession only or becomes an offence of possession with intent to supply. In the case of the latter, neither a penalty notice for disorder nor a cannabis warning is available. I remind the House that dealing in any amount of cannabis is a very serious offence and can result in up to 14 years' imprisonment.
	The guidance sets out a number of aggravating factors which, at present, a police officer should take into account to escalate the response accordingly. Among those aggravating factors are smoking cannabis in a public place or view, a locally identified policing problem or community concern, particularly protecting young people such as where an adult is found in possession in the vicinity of young people, and repeat or persistent offenders for any criminal offence of anti-social behaviour indicating a disregard for the law.
	The proposed introduction of PNDs is specific to cannabis and the dedicated escalation process. Most forms of cannabis are, as a matter of fact, generally recognisable by experienced police officers without the need for forensic analysis. Other controlled drugs, often in powder or tablet form, cannot necessarily be so readily identified without forensic analysis, which precludes a police officer from dealing with the matter on the street, as a PND otherwise enables. As an intermediary step in escalation, PNDs have a greater potential to alter behaviour, providing the offender with a final reminder in the form of a financial penalty to change his or her ways before more serious action is taken. We believe that the disposal will prove valuable to the police in cracking down on those caught in possession of cannabis for personal use and that it will remain a useful addition to their armoury of powers. I beg to move.

Lord Henley: My Lords, this is a funny way to legislate. The Government first introduced an order some time last December in which some 21 different offences were to be subject to PNDs—penalty notices for disorder. No doubt they consulted on that before they issued it, but they then listened to further representations, some coming as late as last week and, last week, withdrew the whole order and replaced it with this order which has only one offence, the possession of cannabis. They were then very anxious to acquire it as quickly as possible, particularly as they want to bring it into effect on the same day as cannabis moves from class C to class B, as announced by the Home Secretary. At the same time as the Home Office or the Ministry of Justice—the Minister will be able to tell me which—tries to send out a message that the possession and use of cannabis are to be taken much more seriously, the punishments available for possession of cannabis are to be relaxed, but only for cannabis and not for any other class B drugs. Perhaps the noble Lord can tell us whether PNDs will be available for possession of class C drugs. Can he confirm that cannabis will be the only class B drug subject to PNDs?
	The noble Lord then told us that that is part of a graduated response to dealing with possession of drugs; it starts with a warning, moves on to a penalty notice for disorder and then, presumably in due course, moves on to some other more serious punishment. We have also been informed that no record will be kept of the PNDs issued and there will be no criminal offence committed by the possessor. How on earth will the police police this? If they do not keep any records of the original warning and of the possession, how will they know whether this is the first, second, or third time?
	A Home Office Minister—Mr Alan Campbell, I think—told MPs examining the proposals in Committee that warnings would be recorded on a new police computer system called pentip—I would like confirmation from the noble Lord on that—but that it would not be in place until 2010. We understand that that contradicts a previous parliamentary answer from the Home Office stating that the system would not be fully operational until about 2012 and that it was already about £10 million over budget, but that is what we have come to expect from the Home Office and the Ministry of Justice. I would like confirmation of those points from the Minister. If that is so, the records allowing the police to know whether a PND or a warning has been issued will not be available to them until 2010 or 2012. Why the desperate haste by the Government to bring this in now, particularly as they will be sending out very mixed messages to the populace at large? On the one hand, they say that they are taking the possession of cannabis more seriously and uprating it from class C to class B, but on the other hand they are relaxing the penalties available for possession of that drug.

Lord Thomas of Gresford: My Lords, I have a confession to make to your Lordships: the swinging 60s passed me by. Consequently, I neither puffed nor inhaled cannabis at any stage and I have no axe to grind today. My only connection with this drug was in prosecuting some people for growing it on an industrial scale in the north-west of England. Unfortunately for them, when they grew it on an industrial scale, it had one tenth of the potency of normal cannabis. There was a great deal of puffing going on in Warrington at the time.
	I am baffled by the Government's policy on cannabis. In 2004, the Home Affairs Select Committee said that it should be reclassified from class B to class C on the advice of an independent panel of experts, the Advisory Council on the Misuse of Drugs. Mr David Blunkett, the then Home Secretary, followed that advice and said that it would free the police to concentrate on more serious drugs and that the use of cannabis would be followed normally by a warning. Then, all of a sudden, we have a reversal of that policy, against the advice of the Advisory Council on the Misuse of Drugs, which said that it was not convinced that moving it to class B, with the possibility of five years' imprisonment for its possession, would have any beneficial effect.
	The council does not believe that criminalising people will assist. It feels that alcohol is more harmful to the population—and certainly to the individual—than cannabis. Mr Danny Kushlick, of the drugs policy think tank Transform, said that nobody would be put off smoking cannabis by the decision to reclassify it. He makes the valid point that if cannabis can be dangerous to a few people but 2 million regularly smoke it, we should have a regulated and supervised market for it, rather than putting its distribution in the hands of criminals. Indeed, as the noble Lord, Lord Bach, well knows, it is the proliferation of drugs, including cannabis and more serious drugs, which lies behind so much of the crime that we suffer in this country.
	Putting cannabis back up to class B, which carries with it as a summary offence a penalty of £2,500 or three months' imprisonment—or, on indictment, five years' imprisonment—is a considerable escalation. One can understand that if the Home Secretary is worried about it, she might decide to make that move. However, she immediately follows this by linking it to the PND—or penalty notice for disorderly behaviour—provisions of the Criminal Justice and Police Act 2001, which I have looked at.
	The offences which lead to on-the-spot penalties include being drunk on the highway, a class 1, magistrate's court offence; throwing fireworks in a thoroughfare, which carries a fine up to level 5 in the magistrate's court; trespassing on a railway, which carries a fine up to level 3 in the magistrate's court; throwing stones at trains, a level 3 offence; and disorderly behaviour when drunk, a level 1 offence. Even the most recent extension, Section 5 of the Public Order Act 1986, on behaviour likely to cause harassment, alarm or distress, is still a summary offence, with a fine up to level 3. All the offences for which penalty notices have been issued in the past have been summary offences, and not even the most serious summary offences.
	To that regime, suddenly, the Government have decided to add an offence punishable by up to five years' imprisonment. Not only that, but one of the results of the proposed alteration is that no conviction will be recorded, as the noble Lord, Lord Henley, said. Payment of the penalty fine will end the whole matter. There will be no possibility for any intervention to make sure that the person concerned does not go on to take more serious drugs or, indeed, to see if it is necessary to cure them of the habit, if that is seen to be in the public good. The messages to the public are completely contradictory and confusing.
	I am not going to oppose this order tonight; let us see how it works out. However, the Government should rethink their drugs policy altogether. Either you clamp down and make the possession of cannabis punishable by up to five years' imprisonment, or you decide to get rid of this criminal subculture, which causes so many of the problems that we face in our streets and cities, and say that the whole thing should be decriminalised. As I said at the beginning, I have no particular interest one way or the other, but it seems that the effects of continuing to criminalise drugs, particularly of this low order, are far worse for our population than for them to be decriminalised. I hope I have made that point; no doubt I will make it again at a later date.

Lord Bach: My Lords, I am grateful to both noble Lords who have spoken. The noble Lord, Lord Henley, asked about the process and why we withdrew the earlier order. We listened to concerns about certain aspects of extending the penalty notice for disorder scheme and decided to consult more widely on the new offences. That consultation will begin shortly. The proposal that cannabis possession should be added to the penalty notice for disorder scheme was made public last October. We believe that there has been plenty of opportunity for people to comment on it. The Government believe that penalty notices should, subject to parliamentary approval, be available to police officers from today, on reclassification of the drug to class B. We have no plans to introduce PNDs for the offence of possessing other drugs, including other class B and class C drugs, largely for the reasons that I stated in opening the debate on this order. Cannabis is well known; most experienced police officers know cannabis when they see it or smell it. We believe that this is appropriate for cannabis possession. It is much the most widely used of these drugs.
	Are PNDs recorded? Yes, indeed they are. PNDs will be recorded for possession on the police national computer, so it will become well known straight away that someone has a PND against their name for cannabis possession. As to warnings, the position is that there is, as the noble Lord, Lord Henley said, no recording at present. However, if one thinks about it, it is clear that many cannabis offences of this kind are committed in a particular locality. The same person will smoke cannabis on more than one occasion in a particular area. There will be police intelligence. It may well be the same police officer involved. Those who have cannabis warnings will take a severe risk if they continue smoking cannabis in the same area as they had previously. The noble Lord is right to point out that when PentiP comes into force from 2010, cannabis warnings will be recorded.
	I turn to other matters that have been mentioned. The noble Lord, Lord Thomas of Gresford, started to debate again the issue of reclassification. Obviously, I listened carefully to the points that he made. One of the reasons for reclassification at this stage, and there are others, is that evidence shows that the cannabis being taken is a good deal stronger than it was a few years ago. The rough figure given is that 80 per cent of the cannabis taken now is of the skunk variety, which, as I think everyone knows, is much more dangerous than other types of cannabis.
	The noble Lord referred to a number of offences which he claimed were very minor compared with the possession of cannabis. Destroying or damaging property under the value of £500 is also an offence for which a PND can be issued; likewise theft of items with a retail value of under £200. So other offences of a fairly serious nature can be dealt with by PNDs already.
	Legalising drugs is not an appropriate response. Drugs are controlled for good reason: they are harmful to health. Their control is a necessary and legitimate means of protecting individuals and the public from the harm caused by their misuse. Prohibition has an important role in restricting availability and keeping the level of drug use under control.
	The new escalation scheme that I have referred to will become well known to those who attempt to take cannabis—first the warning, then the PND, and then their potential arrest. I repeat that these measures will remain at the discretion of the police officer involved. He may decide to arrest on the first occasion if there are aggravating circumstances. I emphasise that this PND is available only to those over 18, as is a cannabis warning; anyone who is 17 or under cannot receive either a cannabis warning or a PND. They will be taken to the police station to see whether they should be referred on to the YOTs. What we are talking about today applies only to those over the age of 18. I am grateful to both noble Lords for their questions and comments.
	Motion agreed.
	Sitting suspended.

Banking Bill
	 — 
	Committee (5th Day) (Continued)

Amendment 174E
	 Moved by Lord Myners
	174E: After Clause 227, insert the following new Clause—
	"Investment banks: Insolvency regulations
	(1) The Treasury may by regulations ("Investment bank insolvency regulations")—
	(a) modify the law of insolvency in its application to investment banks;
	(b) establish a new procedure for investment banks where—
	(i) they are unable, or are likely to become unable, to pay their debts (within the meaning of section 90(4)), or
	(ii) their winding up would be fair (within the meaning of section 90(8)).
	(2) Investment bank insolvency regulations may, in particular—
	(a) apply or replicate (with or without modifications) or make provision similar to provision made by or under the Insolvency Act 1986 or Part 2 or 3 of this Act;
	(b) establish a new procedure either (i) to operate for investment banks in place of liquidation or administration (under the Insolvency Act 1986), or (ii) to operate alongside liquidation or administration in respect of a particular part of the business or affairs of investment banks.
	(3) In making investment bank insolvency regulations the Treasury shall have regard to the desirability of—
	(a) identifying, protecting, and facilitating the return of, client assets,
	(b) protecting creditors' rights,
	(c) ensuring certainty for investment banks, creditors, clients, liquidators and administrators,
	(d) minimising the disruption of business and markets, and
	(e) maximising the efficiency and effectiveness of the financial services industry in the United Kingdom.
	(4) A reference to returning client assets includes a reference to—
	(a) transferring assets to another institution, and
	(b) returning or transferring assets equivalent to those which an institution undertook to hold for clients."

Lord Myners: We now turn to the second debate on investment banks. This concerns three new government clauses which provide for the specifics of the enabling power of the Government to make regulations to change the insolvency regime for investment banks. This power would only be exercised if the Treasury review concludes that a new procedure is needed. The first amendment in this debate introduces the second of four new clauses that will make up the enabling power. This new clause sets out the broad principles that would shape such a modified regime. The Government would be able to modify existing insolvency law in its application to investment banks or establish a new procedure for insolvent investment banks. In line with existing insolvency law, this new regime would apply when an investment bank is either unable or likely to be unable to pay its debts or where its winding-up would be fair.
	When drafting regulations to change the insolvency regime for investment banks the Treasury must have regard to balancing the following needs and issues: first, identifying, protecting and facilitating the return of client assets; secondly, protecting the rights of creditors; thirdly, ensuring certainty for investment banks, creditors, clients, liquidators and administrators; fourthly, minimising the disruption of business and markets; and, finally, maximising the efficiency and effectiveness of the financial services industry in the UK. Noble Lords will appreciate that this list further confirms that the Government are contemplating regulations that could fundamentally affect the priority of claims in an administration. As a result, any order to bring in regulations that modify the insolvency regime for investment banks will be subject to parliamentary scrutiny. I will come back to that point in a moment.
	The third new clause provides the detail about what the regulations must provide for and how they will work. It includes provision—if it is decided to establish a new procedure—for the regulations to set up those persons who can initiate the special procedure or who can make an application to the court for the procedure to be initiated by court order. Under current legislation there are different ways for a company to enter liquidation or administration, and this provision ensures that, should it be decided to create a standalone procedure, we can select the most appropriate way for the new procedure.
	Under the new clause, the regulations may also include provision for new objectives for a new procedure and functions for an insolvency office holder. This would allow, for example, the new regime to give priority to the return of client moneys, if the review so recommended. The regulations may also include provision regarding the conditions that would need to be fulfilled before an investment bank could be put into the new regime or have any special provisions applied. Furthermore, if a new standalone regime is introduced, the regulations may provide for how this new regime would sit with existing insolvency and administration regimes, including bank insolvency and bank administration, in which the investment bank in question also runs a deposit-taking business. Additionally, the regulations may include provision for temporary or permanent moratoriums to be imposed at the onset of the new regime and provision to amend existing enactments for the purposes of the new regime. In addition, the regulations may make specific provision to deal with a number of specific issues, as provided for in subsection (6) of the new clause.
	The regulations may also confer functions on certain bodies—for example, the court, the Financial Services Authority or the Financial Services Compensation Scheme. Noble Lords will note the wide sweep of this enabling power. I repeat that the Government will know what changes to investment bank insolvency are appropriate only once the review has been completed. Let me further remind noble Lords that Parliament will have the opportunity to scrutinise any new regulations that are made under this power and that any regulations made must have regard to both the protection of client assets and the protection of other creditors' rights.
	The fourth and final new clause sets out the detail by which any regulations may be made. The clause will provide that the regulations should be made by statutory instrument and be subject to the affirmative procedure. The Treasury must consult before making any such regulations. On this point, I would remind the House that an expert sub-group of the expert liaison group will also be consulted and will provide guidance to the Government throughout this process. Finally, to provide comfort and certainty to the financial markets, the regulation-making power is subject to a sunset clause so that it lapses after two years, after which time it will have become clear whether it is necessary to proceed with any legislative changes envisaged.
	I believe that these new clauses are necessary for the Government to provide certainty to the market that they intend to deal with the problems raised by the administration of Lehman Brothers International (Europe).

Baroness Noakes: I have Amendment 174GA in this group, which is a response to the second report of this Session from the Delegated Powers and Regulatory Reform Committee, which came out only late last week.
	The committee made it clear in paragraph 20 that this sort of regulation-making power is inappropriate in normal circumstances and that more should appear in primary legislation. It pointed out in particular that the Government themselves concede that banking insolvency law is highly complex and that a significant shift in insolvency law was likely. In those circumstances, the committee believed that secondary legislation was an inappropriate mechanism and said that it was for the Government to justify to the House the exceptional circumstances that resulted in departure from this normal practice. I do not think that the Minister even tried to set out the exceptional circumstances that led to taking this power.
	The Delegated Powers Committee went on to recommend that, even if the Government persuaded the House, the power to make regulations and any regulations made should cease two years after Royal Assent. As the committee said, that would cover any emergency situation, if the Government genuinely needed emergency legislation; it would also give the Government sufficient flexibility to bring forward primary legislation for proper parliamentary scrutiny, if they so wished. Amendment 174GA deals with that recommendation, including the saving for bank insolvency procedures already entered into before the end of the two years.
	The Minister said several times that there was proper opportunity for parliamentary scrutiny. The affirmative procedure simply does not provide that. I have told the Committee more times than I care to remember that there is no opportunity to amend secondary legislation. The kind of legislation which the Government contemplate making by order is very extensive and is exactly the sort that both Houses of Parliament ought to consider on a line-by-line basis.
	The secondary legislation procedure is inadequate, and by a long margin. That is why—although we see that the Government might need to move quickly—there has to be a case for considering, on a proper time scale, whichever permanent solution is put forward to deal with this matter. I am not denying that there is an issue, and for the first time today I am not even challenging what the solutions might be. It is simply that there has to be a proper mechanism at some stage for Parliament to play its full part in the making of such complex, far-reaching law.

Lord Newby: I support the amendment tabled by the noble Baroness. If the Bill as a whole is being done in a rush, these amendments have clearly been done, if not in panic—because the Government fear something terrible happening in the very near future that they cannot necessarily predict—then with us being asked to adopt measures that we would normally throw out. They do not come within a mile of what would normally be acceptable to the Committee or, indeed, to Parliament.
	It seems to me that the Delegated Powers and Regulatory Reform Committee proposal makes the best of a bad job, and it is difficult to see why the Government should not accept that. Two years, whether the powers have been adopted or not, should be long enough for the Government to get their act in order, decide exactly what they want to do and bring forward substantive legislation. I strongly urge the Minister to take this amendment seriously and to accept it.

Lord Northbrook: I support the amendment tabled by my noble friend Lady Noakes, and I repeat what the Delegated Powers Committee said in paragraph 20:
	"Under normal circumstances we would recommend outright that such broad and significant powers are inappropriate, and that substantially more provision should be set out in primary legislation. In the current situation it is for the Government to satisfy the House that exceptional circumstances justify this departure from the balance between primary and subordinate legislation which the House would usually expect".
	Since 1997, there have been too many circumstances in which the Government have left so much to secondary legislation. In this new clause, they are asking for powers that are too broad.

Lord Myners: I am aware that the Delegated Powers Committee has stated that it believes these powers, if permitted, should be limited by stronger time-limiting provisions. I understand that Amendment 174GA would implement that approach. Under my amendment, however, as I have said, the Government have provided that the power to introduce new regulations will lapse after two years if not used. That is to avoid the market uncertainty that might be caused if the potential to make a new insolvency regulation at short notice existed, unused, over a longer period.
	Noble Lords will appreciate, however, that, if new regulations are made under the affirmative procedure, it will be necessary to keep the enabling powers in the Act to keep the regulations in operation and to allow any necessary further amendments to be made. The Government intend that any new regulations would be permanent, and I emphasise that we would consult widely to ensure an effective long-term solution, although the regulations could, if necessary, be subject to further modification in time, subject to the affirmative procedure.
	The limitation that the Delegated Powers Committee has recommended, which would involve both the enabling power and any regulations made under it being guillotined after two years, would breed serious market uncertainty about the insolvency regime that the market would operate under in the near future. Furthermore, there is no guarantee that in the early part of 2011 parliamentary conditions would be such as to allow the Bill to go through Parliament. Therefore, the two-year deadline would mean that, in order to have a Bill ready for an available parliamentary slot, the Government would have to draw one up in parallel with drafting the regulations under the enabling power. There would be no time to test the new regulations out and to learn lessons from how the new insolvency regime was operating before making the new Bill.
	I realise that the Delegated Powers Committee's concerns are significant. The noble Baroness, Lady Noakes, and the noble Lords, Lord Newby and Lord Northbrook, have spoken with strength of conviction on this point. Therefore, I can commit to considering this again and returning to the issue. I hope, on that basis, that the noble Baroness will not press her amendment.

Baroness Noakes: I am grateful that the Minister will consider the matter again. He said in definite terms that the Government intended to introduce permanent legislation under the power. He must think again about that. He proposes to introduce significant legislation by statutory instrument in a way that I cannot contemplate ever having happened in the past. The Minister made some excuse about market conditions affecting legislation going through Parliament. We simply do not understand that. We have demonstrated on more than one occasion that it is perfectly possible to get emergency legislation through quickly but with proper scrutiny. The Minister should be in no doubt that this is one of the most important things that we have discussed because, as the Minister is aware, we regard the recommendations—this is a very clear recommendation from the Delegated Powers Committee—as having a special status in the House.
	Amendment 174E agreed.
	Amendment 174F
	 Moved by Lord Myners
	174F: After Clause 227, insert the following new Clause—
	"Investment banks: Regulations: details
	(1) Investment bank insolvency regulations may provide for a procedure to be instituted—
	(a) by a court, or
	(b) by the action of one or more specified classes of person.
	(2) Investment bank insolvency regulations may—
	(a) confer functions on persons appointed in accordance with the regulations (which may, in particular, (i) be similar to the functions of a liquidator or administrator under the Insolvency Act 1986, or (ii) involve acting as a trustee of client assets), and
	(b) specify objectives to be pursued by a person appointed in accordance with the regulations.
	(3) Investment bank insolvency regulations may make the application of a provision depend—
	(a) on whether an investment bank is, or is likely to become, unable to pay its debts,
	(b) on whether the winding up of an investment bank would be fair, or
	(c) partly on those and partly on other considerations.
	(4) Investment bank insolvency regulations may make provision about the relationship between a procedure established by the regulations and—
	(a) liquidation or administration under the Insolvency Act 1986,
	(b) bank insolvency or bank administration under Part 2 or 3 of this Act, and
	(c) provision made by or under any other enactment in connection with insolvency.
	(5) Regulations by virtue of subsection (4) may, in particular—
	(a) include provision for temporary or permanent moratoria;
	(b) amend an enactment.
	(6) Investment bank insolvency regulations may include provision—
	(a) establishing a mechanism for determining which assets are client assets (subject to section (Investment banks: Definition));
	(b) establishing a mechanism for determining that assets are to be, or not to be, treated as client assets (subject to section (Investment banks: Definition));
	(c) about the treatment of client assets;
	(d) about the treatment of unsettled transactions (and related collateral);
	(e) for the transfer to another financial institution of assets or transactions;
	(f) for the creation or enforcement of rights (including rights that take preference over creditors' rights) in respect of client assets or other assets;
	(g) indemnifying a person who is exercising or purporting to exercise functions under or by virtue of the regulations;
	(h) for recovery of assets transferred in error.
	(7) Provision may be included under subsection (6)(f) only to the extent that the Treasury think it necessary having regard to the desirability of protecting both—
	(a) client assets, and
	(b) creditors' rights.
	(8) Investment bank insolvency regulations may confer functions on—
	(a) a court or tribunal,
	(b) the Financial Services Authority,
	(c) the Financial Services Compensation Scheme (established under Part 15 of the Financial Services and Markets Act 2000),
	(d) the scheme manager of that Scheme, and
	(e) any other specified person.
	(9) Investment bank insolvency regulations may include provision about institutions that are or were group undertakings (within the meaning of section 1161(5) of the Companies Act 2006) of an investment bank.
	(10) Investment bank insolvency regulations may replicate or apply, with or without modifications, a power to make procedural rules.
	(11) Investment bank insolvency regulations may include provision for assigning or apportioning responsibility for the cost of the application of a procedure established or modified by the regulations."
	Amendment 174F agreed.
	Amendment 174G
	 Moved by Lord Myners
	174G: After Clause 227, insert the following new Clause—
	"Investment banks: Regulations: procedure
	(1) Investment bank insolvency regulations shall be made by statutory instrument.
	(2) Investment bank insolvency regulations may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.
	(3) The Treasury must consult before laying draft investment bank insolvency regulations before Parliament.
	(4) If the power to make investment bank insolvency regulations has not been exercised before the end of the period of 2 years beginning with the date on which this Act is passed, it lapses.
	(5) An order under section (Investment banks: Definition)(6)—
	(a) shall be made by statutory instrument, and
	(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament."
	Amendment 174GA, as an amendment to Amendment 174G, not moved.
	Amendment 174G agreed.
	Amendment 174H
	 Moved by Lord Davies of Oldham
	174H: After Clause 227, insert the following new Clause—
	"Banking (Special Provisions) Act 2008: Compensation: valuer
	Without prejudice to the generality of section 12 of the Banking (Special Provisions) Act 2008 (consequential and supplementary provision), it is declared that the power under section 9 of that Act to make provision for the appointment of a valuer includes power to replicate, or to make provision of a kind that may be made under, section 55(1) to (3) of this Act."

Lord Davies of Oldham: Amendment 174H in the name of my noble friend Lord Myners provides for an amendment to the Banking (Special Provisions) Act 2008. The proposed amendment clarifies the provisions of that Act with respect to the ability to make provision, by order, to give information-gathering powers to the independent valuer.
	The Northern Rock valuer has recently written to the Treasury requesting powers to allow him to obtain information from third parties, where such information is necessary for him to be able to determine the amount of any compensation due to former shareholders. As much of the information the valuer might request could be considered confidential by third parties, those third parties may be unwilling to provide that information in the absence of legislative powers to require such information from them.
	Given the independent valuer's experience to date in this regard, the Government now believe it is appropriate to grant him additional powers to obtain information relevant to his valuation work.
	An amendment is needed because the Banking (Special Provisions) Act 2008 does not—unlike this Bill—give the Treasury express powers to provide for the independent valuer to have information powers of this kind. The Treasury of course would provide for this under an order under the affirmative procedure. That will ensure that an appropriate level of compensation, if any, can be determined in a timely fashion.
	Without these additional powers, there is a risk that it may not be possible for the independent valuer to arrive at an accurate valuation of Northern Rock. The same situation would be likely to arise with the independent valuer to be appointed in respect of Bradford & Bingley. I hope, therefore, the Committee will agree that this amendment is essential to ensuring the necessary legislative basis for the provision of powers to the independent valuers of banks resolved under the Banking (Special Provisions) Act. These powers are necessary to the conduct of their work, thus ensuring a swift response to former shareholders and that any compensation due is determined without unnecessary delay. I beg to move.

Baroness Noakes: We understand that this amendment is necessary because the Northern Rock valuer is unable to obtain the information that he requires to carry out a valuation. One's first thought is that perhaps he should have thought of that before signing up for the job. More seriously, giving retrospective powers is a bit unusual. I hope that the Minister can explain a little more what this is about.
	Can the Minister assist the Committee by outlining in what areas the valuer has sought information which is essential to his valuation, in the case of Northern Rock, but which has been denied to him? What persons or types of person have refused to co-operate with the valuer? There is usually a good reason for people refusing to give information. Can the Minister enlighten the Committee on what has been going on and can he also say what this might mean for the timetable for the Northern Rock valuation? I emphasise that we do not normally give retrospective powers of this nature. The Minister justified this on some wide and unspecific grounds of needing to line up this legislation with last year's legislation. That is not good enough; there has to be some specific cause.

Lord Newby: In moving his amendment, the Minister used the phrases "swift response" and "timely evaluation". My understanding is that it took the Government the best part of eight months to appoint a valuer in this case. This seems extraordinary, given the general view that there is nothing to be valued anyway. Can the Minister explain the timetable? Why did it take so long to appoint a valuer in the first place? I do not think a valuer was appointed until November or possibly October, but certainly very late. Also, what are the Government's current expectations about the process going forward?

Lord Davies of Oldham: On that latter point, the Northern Rock valuer was appointed in September 2008. We are as keen as anyone that the valuer should carry out his duties expeditiously. As I indicated, two months after his appointment, he wrote to the Government indicating that he would need additional powers with regard to information. I understand the point that the noble Baroness makes that people always have good reason for withholding information. He did not identify the need for additional information-gathering powers until he wrote to the Treasury at the end of November 2008, so he had had several months seeking to do the work and then identified that he had limitations. We gave careful consideration to his request for additional powers to compel the production of information to interview witnesses where he deemed it necessary to conduct his valuation exercise. There has been evidence of parties, such as previous bidders and Northern Rock auditors, who have been reluctant to provide the information necessary to the valuer's work. In those circumstances, the Government had no alternative but to recognise that the valuer was operating under constraints which would make the job extremely difficult, if not impossible, and would certainly provide for very considerable delay in circumstances where we want this issue resolved as rapidly as possible.
	I was asked why it took so long to appoint the valuer. It was a competitive process during which value for money was a key consideration. The Treasury will pay the valuer a fixed fee for carrying out the valuation. The terms of the appointment are on the Treasury website.
	The Government have not been tardy about these matters. The noble Lord will recall when Northern Rock was taken into public ownership. It has become clear that these powers are necessary, hence Amendment 174H.

Lord Northbrook: The Minister has not answered my noble friend Lady Noakes's question. What information was denied to the valuer? Can we have something a bit more specific on that?

Lord Davies of Oldham: I was quite specific. I indicated the valuer's problems. He said that he was unable to get the information that he required. It is understandable that those who were interested in bidding for Northern Rock might not be too enthusiastic about disclosing information involving them.
	I hasten to add that the valuer is not a government nominee; he is an independent valuer. Of course, he is appointed through due process, but that happens with clear criteria for him to be an independent valuer. If he says that he is having difficulties with access to information, it is only right that the Treasury examine the matter. When he indicated that he could not get the information that he required, and that previous bidders and auditors were not as forthcoming as he had hoped, he asked for these additional powers. It is right that we grant them as expeditiously as we can.

Baroness Noakes: I am somewhat confused by the Minister's response. As I recall, the Northern Rock valuation order made two specific assumptions; first, a common assumption of no financial assistance from the Government; and, secondly, that Northern Rock was not a going concern. I am therefore not quite clear what all this information from previous bidders or auditors will add to a valuation in that context. Is the Minister clear that the valuer needs this information? It is clearly not right to confer powers to interrogate witnesses and the like if the valuer does not need them. The valuation constraints in the Northern Rock order are so narrow that it is jolly difficult to see what questions they would want to ask anybody.

Lord Davies of Oldham: We set up the valuer in an independent role to carry out this important exercise. In making that arrangement, we indicated that if he found that he had inadequate powers to fulfil the task, he could quite reasonably come back to us. He, in turn, identified where he was having difficulty with the information that he sought. Within that framework, we thought that we might be able to given him sufficient powers under the Special Powers Act. It was made fairly clear to us that an order under that Act would not necessarily be acceptable to the House. We are therefore using the Bill for consideration of the matter and to put it on a statutory footing.
	I emphasise the obvious fact that this is a response to a request from a person seeking to do his job, who has been appointed to act independently and to reach those judgments. It is not for the Government to second-guess him.

Viscount Eccles: Can I make absolutely sure that, when auditors are mentioned, we are not talking about the auditors of Northern Rock?

Lord Davies of Oldham: I think that we are. I do not see why we should not be.

Viscount Eccles: That would raise a serious issue of the auditors' duty. I would have thought that the valuer would have been able to sort out the duty of Northern Rock's auditors himself.

Lord Davies of Oldham: I beg to differ with the noble Viscount. The valuer clearly thought this was an important source of information. He has an important job to do. We have created him within the framework of independence with a clear undertaking that if there prove to be barriers to his effectiveness because of limited powers we will seek to solve that problem. We have addressed ourselves to this within the framework of the Bill.
	As I said in my opening remarks, any additional information-gathering powers provided to the valuers would be by Treasury order laid before both Houses of Parliament and subject to the draft affirmative procedure. Once granted to the valuer, the powers would of course be governed by a court or tribunal to judge how he exercises them. We cannot set up the independent position and then say that the whole operation is going to be run from the Treasury. The valuer who has taken this on has indicated to us where limitations on his power give him doubts about the successful fulfilment of his role. Accordingly, he has come to the Treasury and we sought to act within that framework.

Viscount Eccles: I wish to pursue the question of this auditor. The auditor is an officer of the company. Auditors will recognise that he has a duty both to the directors of the company and to the shareholders. I urge the Minister to check whether, in a question of compensation, the reference to auditors encompasses the auditors of Northern Rock or is referring to the auditors of, for example, the bidders, which is a different matter. I entirely agree with my noble friend on the Front Bench; I cannot see why the bidders should provide anybody with any information. They failed in their bids and there is nothing they can say that will be of any value to the valuer.

Lord Davies of Oldham: It is not the Government forming these judgments but the independent valuer on the information he needs. If I have made a mistake and we are not talking about Northern Rock auditors I will write to the noble Viscount correcting that position. I have acted in good faith and understand that to be the position. That is as far as I can go at this moment with the information I have.

Baroness Noakes: As auditors are being discussed, would an order made in accordance with this amendment allow the valuer to go on a fishing expedition through the auditors' papers to see whether a claim for professional negligence could be sustained against the auditors, thereby building a case that value in Northern Rock included an amount that could be recovered from the auditors? Is that something that can be done under Clause 55 and so also under government Amendment 174H?

Lord Davies of Oldham: I hasten to add that the valuer is not an authority. He has not got the authority to carry out a fishing expedition for potential legal action. He is trying to solve the problem of valuation, working in that framework. It is somewhat inappropriate to say that the individual who has taken on the role in those terms would independently take upon himself a fishing expedition to see if he could bring a charge of negligence. Negligence in those terms is nothing to do with him; what is to do with him is the accurate valuation of the bank.
	Amendment 174H agreed.
	Amendment 175
	 Moved by Baroness Noakes
	175: Before Clause 228, insert the following new Clause—
	"FSA and Bank of England cross-membership
	(1) After section 1(2) of the Bank of England Act 1998 (court of directors) insert—
	"(2A) One of the directors shall be the chairman or a member of the governing body of the FSA."
	(2) After paragraph 2(3) of Schedule 1 to the Financial Services and Markets Act 2000 insert—
	"(3A) One of the persons appointed as a member of the governing body shall be a member of the court of directors of the Bank of England.""

Baroness Noakes: I also speak to Amendment 180, Amendment 183 and Amendment 191. With these amendments I return to the theme that the Bill should reflect as far as possible the workings of the tripartite authorities.
	Since the FSA was set up, there has been cross-membership between it and the Bank of England, although one would not find it mentioned anywhere in either of the relevant governing Acts. The chairman of the FSA has been a member of the Court of Directors of the Bank of England, and one of the deputy governors of the Bank of England has been on the FSA board.
	The purpose of my amendment is to ensure transparency and clarity in relation to the membership of the bodies, and, if it is the custom to achieve cross-membership, that should be laid out for all to see. Given the ever closer working that we are promised by the tripartite authorities, it seems right and proper that what might have been an experiment in the late 1990s is now reflected in the appropriate statutes. Therefore, I hope that this amendment simply reflects the practice but, if the Government intend to change that practice, I am sure that the Committee will welcome hearing from the Minister.
	The other amendments in this group relate to the Financial Stability Committee, which we will continue to deal with in detail in later amendments. For the purposes of this group, I have tabled Amendment 180 to ensure that the court member who comes from the Financial Services Authority sits on the Financial Stability Committee. The Financial Stability Committee has a Treasury quasi-member by virtue of subsection (3) of the new Section 2B inserted by Clause 228. It seems odd at the very least that, if the Treasury is to be at the table, the FSA will have no role in the Financial Stability Committee. Amendment 183 is consequential, reducing the balance of the directors on the FSC to allow for the place taken by the FSA.
	I have also tabled Amendment 191, which proposes the deletion of subsection (3) of new Section 2B on a probing basis. I had assumed that the Treasury would want one of its men sitting on the Financial Stability Committee to ensure proper Treasury involvement in financial stability matters. However, the absence of the FSA from the FSC has made me doubt this. Perhaps the Treasury is there to oversee the Bank. We may need a clearer understanding of what new subsection (3) does in giving the Treasury a quasi-seat.
	If the Government do not want an FSA man on the Financial Stability Committee, I hope that the Minister will explain how the FSA is to be involved in the work of the FSC. If it does not have a formal seat, perhaps it should have a quasi-member in the same way as the Treasury has; alternatively, perhaps neither of them should be there.
	The noble Lord, Lord Eatwell, has some more radical proposals about the role of the FSA in his amendments in this group, and I look forward to him speaking to them. I know that the noble Lord, Lord Turnbull, wished to be with us for this group of amendments and he has passed a copy of his speaking notes to me and to the noble Lords, Lord Myners and Lord Eatwell. Suffice it to say that the noble Lord, Lord Turnbull, is strongly in favour of the amendments in the name of the noble Lord, Lord Eatwell, which bring together more formally the Bank and the FSA in the context of these new financial stability arrangements. I beg to move.

Lord Eatwell: The Bill will create major powers for the management of financial instability. However, the powers in the Bill will only be as effective as the system that is to implement them. That is why the current debate on the role of the Financial Stability Committee is so important.
	If the Financial Stability Committee is to be an efficient means of translating those powers into action, I believe that it must pass three tests. First, it must be consistent with the structure and character of financial services—in particular, with the origins and location of financial instability. Secondly, it must be consistent with the structure of powers as defined in the Bill. Thirdly, it must be constituted in such a way that it will be flexible and responsive to the new problems that will inevitably assail financial services and the British economy in the future.
	What lies behind those three tests? The first is consistency with the structure and character of financial services. As noble Lords may recall, at Second Reading I argued that in the past three decades the structure of financial services in this country has changed fundamentally and that this change has been an important source of our current woes. The risks to the stability of the financial system are not, as they may have been in the past, located solely in the deposit-taking banks. The disintermediation of the financial system, the creation of long chains of counterparty risk by investment banks and hedge funds and the associated shadow banking system, and the integration of previously distinct markets and institutions into a relatively barrier-free financial system, has extended the potential for financial contagion far beyond deposit-taking banks. After all, in the United States the major institutional failures have occurred outside the banking system—in investment banks, notably Lehman Brothers, and in AIG, an insurance company.
	If the Financial Stability Committee is to be consistent with the actual structure of the financial services industry today, it must have the information, analysis and stature to measure up to the challenges of a disintermediated financial system. In the current division of regulatory responsibility, the Bank of England has no direct knowledge of the behaviour of firms or the changing structure of markets. That detailed knowledge of markets and firms rests in the Financial Services Authority. The Bank of England simply does not have the detailed supervisory knowledge that it needs to manage financial stability—not just of the banks but of the structure of financial institutions in general. Therefore, by creating the Financial Stability Committee as a sub-committee solely of the Court of the Bank of England as currently proposed, the Bill fails the first test—the test of consistency with the structure of financial services as they really are.
	Secondly, is the structure of the Financial Stability Committee operationally consistent with the powers in the Bill? During this Committee stage several noble Lords have commented on the awkward dichotomy of powers as between the Financial Services Authority and the Bank of England. The FSA has the trigger power in Clause 7 and the FSA must be consulted at stage after stage. It will be evident from what I have said already that the operations and information systems of the FSA are vital to the coherence of this legislation. If we are to have a distinct FSA and Bank with clearly demarcated responsibilities it is vital for the consistency of the Bill that they are united in the Financial Stability Committee to deal with what must be a joint responsibility. The Bill fails that second test.
	Thirdly, on flexibility for the future, it must be obvious to all that the structure of the financial services industry must change. It is therefore important that the Financial Stability Committee has the flexibility and breadth of vision, and hence the wide range of experience and opinion needed to deal with these changes. Confining the Financial Stability Committee to the staff and court of the Bank is excessively introverted and restrictive. Thus, the Bill, as drafted, fails the third test.
	Starting from the position that the proposals, as presented in Clause 228, fail the three tests, I have proposed Amendments 178A, 179A to 179D, 182A, 186A, 186B, 188A, 190A, 192A, 192B, 194A, and consequential Amendment 201A to Clause 239. These amendments will enable the Bill to meet the three tests which I believe the structure of the Financial Stability Committee should meet. The essence of the amendments, which I hope the Minister will accept even if he does not like their particular form, is to make the Financial Stability Committee a joint committee of the court of the Bank and of the board of the Financial Services Authority. This seemingly simple change would transform the role, scope and influence of the Financial Stability Committee for the better.
	Today the FSA has no direct responsibility for systemic risk. That responsibility rests with the Bank of England but then neither agency has a statutory responsibility for financial stability. The Bill imposes the responsibility for financial stability on the Bank by amending the Bank of England Act 1998. Amendment 201A would perform the same task with respect to the FSA by amending the Financial Services and Markets Act 2000. While a current statutory objective of the FSA is the maintenance of market confidence, it has had, until now, no specific objective of financial stability. It should have such an objective. On the other hand, in the Bill, the management of financial stability becomes a statutory objective of the Bank. However, it does not have the market information to carry out the task it has been given. The FSA has the information, but not the powers, and the Bank has the powers, but not the information.
	This dangerous dichotomy, already too evident in recent events, can be overcome by making the Financial Stability Committee to be established by Clause 228 a combined committee of the Bank and the FSA jointly and severally responsible for financial stability. This would have the dual advantage of informing the Bank's stability analysis about the actual operations of firms in disintermediated markets and, at the same time, ensuring that financial stability became a basic tenant of the FSA's operational philosophy. In other words, the Financial Stability Committee would be an operational bridge between the FSA and the Bank of England, the bridge that has been so conspicuously lacking in recent months. This tackles the first test.
	The joint committee would also overcome the awkwardness in the allocation of responsibilities in the Bill and answer the question raised by a number of noble Lords about who is in charge. If my amendments are accepted, not only are the respective agencies in charge of areas falling within their particular competence, but they are jointly and severally responsible for financial stability, with that joint responsibility being expressed through the joint Financial Stability Committee. That passes the second test.
	I now turn to the composition of the Financial Stability Committee proposed in my amendments. I have attempted to keep the committee small, roughly the same size as originally proposed, yet incorporating the key decision-makers in both organisations and retaining the Government's objective of a significant role for non-executive directors, in this case, of both organisations. The joint chairmen of the committee will be the governor of the Bank and the chairman of the FSA. The two deputy governors of the Bank will be joined by the chief executive of the FSA and one other managing director, probably the managing director responsible for wholesale and institutional markets. There will be a non-executive director from the Bank and one from the FSA. In addition, I propose that there be two independent members appointed by the Treasury. My hope is that they will be informed, sceptical and contrarian. They should not be yet more mutually reinforcing City grandees. Such independent members have been a considerable success on the Monetary Policy Committee, whose collective embarrassments at its actions over the past year would have been all the greater if it had not included that splendid, talented contrarian Professor David Blanchflower, who is sadly leaving the MPC. The possibility of including independent members in addition to the non-execs will greatly increase the flexibility of the committee, and hence the composition of my proposed joint committee passes the third test of flexibility.
	I hope that the Minister will understand and accept the spirit of these amendments. I will certainly understand if he wishes to modify my proposals on the composition of the committee—it might benefit from a couple more non-execs, for example—but I would find it difficult to believe that he would reject the underlying logic of the proposals, and I am sure that he will want to consider that logic prior to Report.

Lord Newby: I have great sympathy with the case made by noble Lords who have spoken and, in particular, with the proposals made by the noble Lord, Lord Eatwell. The Bank's objective of protecting and enhancing the stability of the financial system of the United Kingdom—the formula in the Bill—is impossible to do with the resources at its disposal and with its functions and those of the FSA. The FSA knows—or should know—what is going on in individual institutions to a far greater extent on a day-to-day basis than the Bank does, and the FSA needs to be in day-to-day touch with the Bank about that information on a rolling basis. The proposal of the noble Lord, Lord Eatwell, sets up a mechanism that enables that to happen.
	The failure of one bank can lead to a failure in stability of the entire financial system, as we have seen in recent months. Surely it makes sense for the people who should and do know what is happening in any bank to inform the Bank of England in an orderly, structured way through this committee, rather than having the Bank looking down and telling them what constitutes the stability of the system, when, almost by definition, it cannot have the information at its fingertips that will enable it to do its job. I hope that the Minister will accept the spirit, if not the letter, of these amendments.

Lord Myners: Amendment 175 would place on to statute the requirement that a representative of the Bank of England should sit on the governing body of the Financial Services Authority, and that a member of the FSA's board should serve as a director of the Bank of England's court.
	Noble Lords will be aware that it is already possible under current legislation for such cross-memberships to exist. Nothing in law prevents such arrangements. In fact, it is established practice that a deputy governor of the Bank—currently Sir John Gieve—sits on the FSA's board, and that the chairman of the FSA serves as a non-executive director of the Bank. This long-standing and mutually beneficial arrangement has been important over the years in enhancing communication and co-ordination between the two authorities' strategies and activities. I have no reason to suppose that it will cease in the foreseeable future. As former members of the court, the noble Baroness and I have seen this successful arrangement in action. Consequently, I have considerable sympathy with the spirit of her amendment. However, I do not agree that it is appropriate to place this arrangement on a statutory footing.
	First, it is unnecessary, as cross-membership of the FSA and Bank's governing bodies is already allowed. Secondly, as I have said, I see no reason for this or any subsequent Government not to continue the current practice of cross-appointing a member of court to the FSA board and vice versa, unless it were inappropriate or impossible to do so. I accept that this would occur only in exceptional circumstances. However, in order to allow for this possibility, we do not think it is appropriate for the arrangement to be a statutory requirement.
	Amendments 180 and 183 seek to appoint the FSA's representative on the Bank of England's court as a member of the Financial Stability Committee established by the clause. We will discuss the form and function of the Financial Stability Committee when considering later amendments, and I do not wish to pre-empt that debate. However, in relation to these amendments, I emphasise that one of the Government's priorities in establishing the Financial Stability Committee is to provide the Bank of England with as much relevant expertise as possible to support it in its enhanced financial stability role under the Bill. That is why we are undertaking a recruitment process to put in place a new Court of Directors. As part of the recruitment, we are ensuring that members of the court will have the right mix of knowledge and expertise to manage the Bank's affairs effectively. They will include non-executive directors with financial and banking backgrounds who are also, as my noble friend urged, challenging, engaged and occasionally contrary. This relevant expertise in the area of financial stability, which I believe will be important for a number of members of the court, will be particularly crucial for the four directors who will form part of the new Financial Stability Committee. Depending on circumstances, it may be appropriate for a member of the FSA's governing body who is also a member of the court to be present at meetings of the FSC.
	However, we believe that it is important that members of the Financial Stability Committee can secure input and expertise from outside the Court of Directors if they wish. This is why proposed new Section 2B(4) of the Bank of England Act 1998 will allow the committee to co-opt other non-voting members to the committee. These could include a representative from the Financial Services Authority or elsewhere. Therefore, although in principle I agree with many of the sentiments behind the amendment proposed by the noble Baroness, Lady Noakes, I do not believe that it is necessary to place these arrangements in the Bill.
	Amendment 191 would remove the Treasury's ability to appoint a person to represent the Government on the Financial Stability Committee. I would like to reassure the House that the Government remain committed to the independence of the Bank of England, with this provision: it is not our intention to allow the Treasury to exert any undue influence on the Bank's decision-making process. This is why the Treasury's representative will be a non-voting member of the FSC. However, it is wholly appropriate for the Treasury to attend these meetings in the same way as a Treasury representative attends all meetings of the Monetary Policy Committee. The purpose will be to ensure that the FSC is fully briefed on all relevant aspects of the Government's economic and financial policies, and that the Chancellor is kept fully informed about the Bank's actions to ensure financial stability. I hope that this explanation has served to reassure the noble Baroness and that she will feel able to withdraw her amendment.
	As we have heard, the amendments of my noble friend Lord Eatwell would make the Financial Stability Committee a joint committee of the Bank of England and the Financial Services Authority. While I can understand what my noble friend is trying to achieve, I respectfully suggest that the committee he envisages is unnecessary and inappropriate. In addition, a committee set up along the lines that my noble friend suggests would not be able to achieve the purpose for which we are creating the Financial Stability Committee; that is, supporting the Bank of England's strengthened and extended financial stability remit.
	I note that Amendment 201A would insert wording into the FSMA to provide the Financial Services Authority with the same financial stability objective as we are giving the Bank of England under Clause 228. The FSA already has responsibility for supporting the stability of the financial system of the UK as part of its objective under Section 3 of the FSMA to maintain market confidence and its other statutory objectives. Therefore, we do not consider that an express objective relating to financial stability is appropriate.

Lord Eatwell: The words "financial stability" do not appear in the objectives of the FSA. The words "market confidence" appear, to which I referred in my speech. Financial stability is not referred to in the FSMA.

Lord Myners: I thank my noble friend for his intervention. I said that the Financial Services Authority already has responsibility for supporting the stability of the financial system. I do not believe I said that the words "financial stability" appear in the FSMA.

Baroness Noakes: I should like to support what the noble Lord, Lord Eatwell has said. If the Minister read the early provisions of the FSMA, I think he would struggle to find support for what he has just asserted it contains. There is no reference to "financial stability". There are an awful lot of things such as consumers and market confidence, but not financial stability. The Minister is constructing an argument on no basis whatever.

Lord Myners: For the benefit of the noble Baroness, I repeat the reply that I gave my noble friend Lord Eatwell. The Financial Services Authority has a responsibility for supporting the stability of the financial system of the UK as part of its objective under Section 3 of the FSMA; namely, to maintain market confidence. Market confidence is critical to financial stability; it is an important pre-condition to, and indeed a feature of, financial stability. I suggest therefore that the Financial Services Authority has a nexus with financial stability.
	Before my noble friend's intervention I was dealing with his amendments which seek to establish a joint Financial Stability Committee of the Bank and the FSA. I should like to set out why, respectfully, I disagree with the purpose of those amendments. First, it is entirely unnecessary to establish a new committee whose aim is to allow the tripartite authorities, or any two members thereof, to discuss financial stability. There are clearly well established mechanisms for the tripartite authorities to communicate and to co-ordinate their actions in relation to their joint and individual responsibilities, including that of safeguarding the UK's financial stability. The three authorities meet at a number of levels on a regular basis under the auspices of the memorandum of understanding. The standing committee meets at least monthly—during recent times it has been meeting weekly and even daily to discuss financial stability issues—and it can convene at any time when necessary.
	These arrangements have proven successful. Recent actions taken to safeguard and strengthen the UK's banking system and wider financial stability have demonstrated the tripartite arrangement at its best, with the authorities working together in an effective and timely manner to stabilise UK banks and support the long-term strength of the economy. An additional forum for the entire tripartite to convene to consider issues of financial stability is therefore unnecessary.
	Secondly, the arrangements that my noble friend Lord Eatwell seeks to put in place are, with respect, unworkable. His amendments would create a joint committee—

Lord Higgins: I got the impression a moment ago that the noble Lord said that an additional forum between the tripartite authorities to discuss financial stability was unnecessary. Is that not what this committee is doing?

Lord Myners: No. An additional forum for the entire tripartite to gather is unnecessary. This is not a forum where the tripartite authorities are gathering for the purpose of bringing together the thinking of the Financial Services Authority, the Bank of England and the Treasury; it is a sub-committee of the court of the Bank of England.

Baroness Noakes: We are all struggling with the concept of why the tripartite authorities do not need something like a Financial Stability Committee. If the Bank of England needs one, why do not either each of the tripartite authorities—which would seem unnecessarily duplicative—or, more properly, the tripartite authorities overall? I cannot understand why the Government are concentrating on the Bank, which has a committee with the Treasury on it but not the FSA. The whole arrangement seems designed to unbalance the tripartite working arrangements when it should be bringing them closer together. The tripartite arrangements were put in place to remedy the deficiencies that arise when you have fragmentation among different institutions.

Lord Myners: We are in danger of confusing a number of separate issues. The Financial Stability Committee is a committee of the court of the Bank of England. We will come at a later stage in our debate to the role of the Financial Stability Committee and how it sits vis-à-vis the executive of the Bank, including the governor and the court. It is not a part of the tripartite arrangement, which is higher up in the structure which brings together the three tripartite authorities.
	Given that the Bill places on the Bank a statutory responsibility for financial stability, the Government believe that the effectiveness of that would be strengthened by the creation within the court of a committee bringing together executive and non-executive members of the court, and others who may be invited to serve, to focus attention on the issue of financial stability. We shall cover those issues in some detail later in the Committee's work this evening.
	With considerable respect, I believe, as I said, that the proposals put forward by my noble friend Lord Eatwell are unworkable. I understand that the intention of his amendments is to facilitate and encourage co-ordination and co-operation between the Bank and the FSA in the area of financial stability. However, setting up a joint committee along these lines would in practice run the risk of blurring the lines of accountability of both governing bodies. In addition, the proposal that this joint committee should make recommendations to the Bank and the FSA on their financial stability strategies is inappropriate. Executives and non-executives of the Court of the Bank of England cannot be expected, any more than the board of any institution other than the FSA can be expected, to have the knowledge and understanding of the FSA's role, strategy, culture and operations, which they would need to make recommendations on the FSA's strategy. As I explained, there is already an appropriate forum where the FSA, the Bank and the Treasury can meet to discuss financial stability issues and co-ordinate action within the authorities' spheres of responsibility in order to address those issues.
	I should also mention that the proposed balance of membership in my noble friend's amendments is somewhat skewed towards the FSA. That would be inappropriate considering the Bank's new statutory financial stability responsibilities. However, I make that observation in the knowledge that my noble friend suggested he was open to alternative suggestions on the membership of the Financial Stability Committee.
	My main reason for disagreeing with my noble friend's amendments is that the committee he proposes would not fulfil the Government's objectives in setting up the Financial Stability Committee. The Banking Bill will strengthen and enhance the Bank of England's role in financial stability by providing it, first, with a new statutory objective for financial stability and, secondly, with additional policy levers in the shape of the special resolution regime and a statutory role in the oversight of inter-bank payment systems. These new tools will complement the Bank's existing roles in this area, such as the provision of liquidity support.
	The new Financial Stability Committee will support the Bank in its pursuit of its new statutory objective and provide expert advice on the use of its tools, both new and existing, to assist the Bank in the fulfilment of its statutory responsibilities in respect of financial instability. That is why the committee will be set up as a sub-committee of the Bank of England which is fully integrated into its governance structure and with clear lines of accountability running back to the Court of Directors. We intend that the Financial Stability Committee, alongside the newly reformed Court of Directors, will underpin and support the Bank of England's strengthened financial stability remit. If we accepted the amendments of my noble friend Lord Eatwell, the new joint committee that he plans to create would, by virtue of its nature and composition, not be able to fulfil that supporting role as effectively within the Bank of England. I am therefore unable to accept the premise of my noble friend's amendments, and I respectfully ask him not to press them.

Lord Eatwell: My noble friend's brief must have been written by several hands, such is the number of inconsistencies and confusion within it. I shall point out a number of them. We were told that the committee would be unworkable because it would blur the arrangements between the Bank and the FSA, yet we were told at the same time that the tripartite committee, which is so important and influential, somehow manages not to blur these responsibilities between the Bank and the FSA. However, this tripartite committee will do just the things that I have suggested for the proposed committee. The tripartite committee must therefore be doing a blurring good job, as indeed it would seem to have been doing over the past three years, such has been its ineffectiveness until its more recent and much more successful endeavours.
	I was also told that the non-executive members would not understand the culture and nature of the different institutions. However, in reply to the noble Baroness, Lady Noakes, the Minister said that it was tremendously important to have directors shared between the two institutions so that they understood their culture and effectiveness. Do we want that understanding, or do we not? Perhaps the noble Lord could let us know.
	The Minister started by saying that a joint committee could not support the Bank of England in its tasks. Surely what we have here is a sub-committee of the Court of the Bank of England itself. It is an internal, restrictive, introverted organisation, rather than one which reaches out to the information set that it needs to operate, which is in the hands of the Financial Services Authority. On the contrary, I suggest that it is the joint committee which I have proposed that would indeed support the Bank of England with the information that it needs to achieve its goals.
	My noble friend also referred tangentially to the Financial Services Authority and the Financial Services and Markets Act. He was not a Member of your Lordships' House when that Act was passed. If he had been, he would have heard me moving amendments that required incorporation of the phrase "financial stability" into the objectives of the Financial Services Authority, amendments which the Government rejected because financial stability was the task not of the Financial Services Authority but of the Bank of England.
	There are also some peculiar points in the Government's proposals which should have some attention if, perhaps, there is redrafting to be done for Report stage. For example, there is this reference to voting. This is clearly a cut-and-paste job from the Monetary Policy Committee. The Monetary Policy Committee has a clear objective, a defined role and a specific decision to make, on which it must vote. However, the committee, if this is to be a truly effective financial stability committee, will be involved in far more wide-ranging and far more nuanced discussions on the nature of legislation that has to be brought forward. The notion of voting is rather outside any of the likely processes of operations of such a committee.
	Finally, the Minister said that the committee would not fulfil the Government's objectives. The Government's objectives are so confused and obscure that I am not surprised that my proposed committee would not meet them. I hope my committee has some clarity with respect to its objectives. Indeed, I finish simply by asking: why is this clause here at all? It would be perfectly possible for the Court of the Bank of England to create this sub-committee under its own rules of operation. Why do we need primary legislation to establish this sub-committee? Surely, if this sub-committee is to be really effective, and if we are going to take financial stability seriously, financial stability has to be incorporated into the operating ethics of the Financial Services Authority, and the information systems of the Financial Services Authority have to be incorporated into the financial stability decision-making of the Bank of England. That is what my amendments were designed to do.
	I am very disappointed by the Minister's response, since it seemed not even to take seriously the issues that I put forward, which are entirely relevant to the financial stability objectives of the Bill. I reserve my position to consider what I want to do.

Baroness Noakes: The noble Lord has expressed the frustration that I felt to some extent at the response to my more modest amendments, which tried to reflect partly what happens in practice in respect of cross-membership, and partly the need for the FSA to be properly involved in the consideration of financial stability within the Bank. What is the point of having tripartite authorities if you then go away into your own bunkers and try to pretend that the other authorities do not exist, except of course that the Treasury is always to be found one way or another overseeing things?
	I am disappointed that the Minister has shown no understanding that the clause is wrongly conceived. I do not know whether the right answer lies in my rather minimalist solution or in the rather more fundamental rewriting of the provisions in relation to the FSA and the Bank of England of the noble Lord, Lord Eatwell. I am clear that some changes should be made to the Bill before we return it to the other place. We have a lot of thinking to do before Report, which will be upon us in no time at all. I see little point in asking the Minister to repeat ideas that we found incomprehensible, so I beg leave to withdraw the amendment.
	Amendment 175 withdrawn.
	Clause 228 : UK financial stability
	Amendment 176
	 Moved by Baroness Noakes
	176: Clause 228, page 111, line 33, at end insert—
	"(1A) The Treasury may by notice in writing to the Bank specify for the purposes of subsection (1) what the stability of the financial systems is to be taken to consist of.
	(1B) The Treasury shall issue a notice under subsection (1A) before the end of the period of 7 days beginning with the day on which the Banking Act 2008 comes into force and that notice shall remain in force until the Treasury issues another such notice.
	(1C) Where the Treasury gives notice under this section, they shall—
	(a) publish it in such manner as they think fit, and
	(b) lay a copy of it before Parliament."

Baroness Noakes: I shall speak also to Amendments 177 and 178. Amendment 176 would add three new subsections to new Section 2A of the Bank of England Act 1998, with the aim of providing the Bank of England with clarity about its financial stability objective.
	My three amendments draw on the mechanism used by the Government to inform the Bank of England what price stability is to be taken to be in relation to the monetary policy objective. This is set out in Section 12 of the Bank of England Act 1998. The main difference is that the price stability objective is set annually. I have drafted the amendment so that the financial stability objective stays in place until formally changed.
	It would be an open and transparent way forward, and avoid ambiguity. It is important because when the Bank articulated its view of financial stability in another place, both in evidence to the Treasury Select Committee and the Public Bill Committee on this Bill, it gave a narrower definition of financial stability than is contained in the draft code of practice. The Bank's definition was process-driven and focused on the payments systems. Others who gave evidence to those committees gave a broader definition, and the Government use a broader definition in the code of practice.
	If the Treasury set out what it meant, it would be clear that the Bank was working to the right objectives, and not some narrower ones. That would be preferable to the proposal in new Section 2A(2) that the court sets the Bank's strategy in relation to its financial stability objective in consultation with the Treasury.
	Amendment 177 would delete the need to consult the Treasury as to the Bank's strategy for financial stability, which would be consistent with the way that the Bank works in relation to all its other functions. There is no mention of the Treasury in any aspects of the Bank's strategy and objectives set out in Section 2 of the 1998 Act.
	Finally, Amendment 178 would provide an alternative to the Treasury specifying what it means by financial stability and require the Bank to use whatever definition is in the code of practice. As I have mentioned, the definition given by the Bank of England in another place was narrower than that in the draft code. If the Government cannot accept the letter-writing solution specific to the Bank's objective proposed in my amendments, I suggest that they consider Amendment 178, which at least provides a cross-reference to the code of practice. I beg to move.

Lord Higgins: I support my noble friend. It may be appropriate to make one or two general remarks about the whole proposal for a Financial Stability Committee which seems to some extent to be based on an idea similar to the Bank of England's Monetary Policy Committee. It is not clear where ultimate responsibility for financial stability rests. I would have thought it ought to be with the Government and the Treasury rather than with the Bank of England. The idea that you can somehow delegate this to a Committee, which will then decide what the strategy is, seems to be a mistake. My noble friend is right to say that the Government should start by deciding what the financial stability objective is. It is not clear why it must be left to a committee of this sort, with all the likely problems which the noble Lord, Lord Eatwell, mentioned such as whether the advice comes from one member of the tripartite group or another.
	Do the Government have a clear idea what they mean by financial stability and how do they see this Committee, if it is set up, relating to the Monetary Policy Committee as far as the overall economic management of the country is concerned?

Lord Myners: Amendments 176, 177 and 178 are seeking to do similar things in slightly different ways. The intention behind them appears to be for the Treasury to provide the Bank of England with a single, definitive meaning of financial stability on which the Bank must rely when formulating strategy it intends to follow in pursuit of its new financial stability objective. As my noble friend Lord Davies of Oldham explained in an earlier debate, it is not possible to set out in a statute an exhaustive definition of financial stability. I believe that the noble Baroness, Lady Noakes, accepted this during a previous debate and I refer the Committee to the Official Report of 13 January at col. 1171.
	I note that in formulating Amendment 176, which requires the Treasury to set out in writing what the stability of the financial system is to be taken to consist of, the noble Baroness has borrowed sections from the Bank of England Act relating to monetary policy. It is not possible, however, to set an exhaustive definition or target for financial stability in the same way as we do for inflation. The requirements for financial stability are context-specific and liable to vary as the operation of global financial markets changes. As my noble friend Lord Eatwell said a moment ago, much of the discussion and decision making of the Financial Stability Committee will be nuanced.
	The approach taken in this Bill provides the necessary flexibility so that the strategy and policy measures adopted by the Bank to achieve its objective can change over time to respond to changing market circumstances and situations. The Bill also provides for the Bank, through its court, to consult with the Treasury on the setting of its financial stability strategy. I believe this addresses the point that the noble Lord, Lord Higgins, made a few moments ago.
	This mechanism, which Amendment 177 seeks to remove, will help to ensure that the Bank's approach has a coherent fit with the work of the other authorities in the UK responsible for maintaining financial stability. Amendment 178 would require the Bank to have regard to the guidance on financial stability contained in the code of practice described in Clause 5. As my noble friend Lord Davies described last week, the code of practice, while containing a useful elucidation of what is meant by the term financial stability, is in no way intended to give a single, exhaustive definition of financial stability. Rather, the code seeks to give guidance on the meaning of financial stability, guidance that is designed to be used to facilitate decisions relating to whether the general and specific conditions in the SRR have been met. I would, of course, expect the Bank to consult a wide variety of sources of information while formulating its financial stability strategy and consider as many different definitions of financial stability as possible, including that in the code of practice. But I believe that it would be inappropriate to include in the Bill a requirement for the Bank to have regard to one individual source—moreover, one that is designed for use in a very specific and limited context.
	I hope that this explanation of the Government's thinking around financial stability and the Bank's financial stability strategy has helped to clarify the situation, and I hope that the noble Baroness will feel able to withdraw her amendment.

Viscount Eccles: I offer one definition of financial stability, or at least a test, which might be considered when the Treasury and the Bank of England are doing their work—the avoidance of queues of depositors outside the branches of any bank or building society.

Lord Myners: I am grateful to the noble Viscount, Lord Eccles, for that helpful contribution.

Baroness Noakes: I thank my noble friends Lord Higgins and Lord Eccles for their contributions to this debate.
	The Minister has disappointed me yet again. The Government seem to want to keep financial stability as loose as possible. I concede that I accepted that financial stability should not be on the face of the Bill but, as the Minister will recall, especially if he looks carefully at Hansard, I argued strongly for a definition to be required to be included in the code of practice. It is right, for consistency across the tripartite authorities, that the Treasury defines what it wishes to be meant by financial stability for the Bank then to use. It is sheer nonsense to say that the Bank can make up its definition and consider as many definitions as it wants. I do not think that I have never heard such a stupid thing come from a ministerial source.
	The Government should be clear about what they want the Bank to do and tell the Bank what the parameters are—that is all we are really asking for—and then the Bank can deal with it. The important thing is that there is clarity and transparency about that, and financial stability can be seen as a common currency. I do not doubt that on individual cases decisions have to be nuanced. Definitions will not cope with all individual cases and definitions will change over time. But to think that the Bank should gather in as many definitions as possible is plainly ludicrous.
	I do not think that we are going to make any more progress, because the Government are in a complete mindset this evening that the Bill is perfect. I assure the noble Lord that not a lot of people think that it is. We will return to this on Report.
	Amendment 176 withdrawn.
	Amendments 177 and 178 not moved.
	Amendment 178A
	 Tabled by Lord Eatwell
	178A: Clause 228, page 111, line 38, after "a" insert "joint"

Lord Eatwell: As I said at the end of my previous remarks, I felt that the Government had not taken cognisance of the arguments associated with the Financial Stability Committee. It sorely tempts me to seek the views of the Committee, but it would be rather unfair to do that at this late hour. It would be more appropriate on Report, when I hope that we will have a larger attendance for this particular issue. We will return to it; the Government have got it wrong and do not have a coherent argument to express on why they think it is right. We should give them the chance to have another go at it.
	Amendment 178A not moved.
	Amendment 179
	 Moved by Baroness Noakes
	179: Clause 228, page 111, line 38, leave out "sub-committee of the court of directors" and insert "committee"

Baroness Noakes: I shall move Amendment 179 and speak to the other five amendments in this group. In doing so, and in subsequent groups, I am broadly taking the structure of the Financial Stability Committee as the Government have drafted it, but seeking to improve it. However, that is in no sense to say that I have moved from my position on the first group of amendments, which we debated at length.
	These amendments concern the nature and membership of the Financial Stability Committee. The Bill provides for it to be a sub-committee of the court. We find that concept odd, as the FSC will have functions extending well into the realm of the executive functions of the Bank rather than the court, yet the court will have the responsibility to determine and review the Bank's strategy on its financial stability objective. Amendment 179 turns the FSC into a committee of the Bank rather than the court, which is how the MPC is constituted. By emphasising the role and responsibility of the Bank, the oversight role of the court is made much clearer.
	The Bill proposes that the FSC is composed of the governor, two deputy governors and some non-executive members of court. My other amendments deal with two questions: who from the Bank should be on the committee, and should court non-executives or external members be appointed? Look at the composition of the MPC: the Bank's members are not only the governor and two deputy governors, but its two most senior executives with monetary policy responsibility. My amendment has the effect of replicating that for the Financial Stability Committee.
	Why have the Government chosen to exclude the senior executives with responsibility for financial stability? Take the case of Mr Paul Tucker, the current executive director with responsibility for markets. He is soon to be a deputy governor, but would it have been realistic to have had a Financial Stability Committee operating without him?
	What is the relationship between that committee and the Financial Stability Board, which has operated within the Bank for some time? That board has the governor, two deputy governors and the four key executive directors of the Bank. Will the Financial Stability Board be subordinate to the FSC, operate in parallel to it or disappear? This point links to one made earlier: that it is perfectly possible for the Bank of England to create the equivalent of the Financial Stability Committee without legislation. The Bank has had a Financial Stability Board ever since the 1998 Act came into effect. There is no reason at all to create that committee within the Bank.
	My Amendments 182, 185 and 189 would have the effect of replacing non-executive members of the court with four external members, appointed by the Chancellor of the Exchequer. Importantly, the Chancellor would appoint only those members with the right knowledge and experience, a formulation mirroring how external members of the MPC are appointed. The noble Lord, Lord Turnbull, who is unable to be in his place, made the telling point that trying to seek non-executive members of the Financial Stability Committee from the court meant that those four members would come from an extremely small gene pool of nine independent court members.
	It is obvious that someone sitting on the Financial Stability Committee needs knowledge and experience of financial stability matters, but neither the 1998 Act nor this Bill make it a requirement for membership of the court that a person has any specific knowledge, or experience of anything. I have no problem with that, as membership of a board is an art, not a science. The overall driver should be the ability to contribute to the full range of issues affecting the Bank. It may unnecessarily narrow the pool of potential members if at any time appointments to the court were driven only by the need to fill a place on the Financial Stability Committee. As I said, nine members of the court and four going on to the FSC start to restrict options.
	Other detailed points I might pass for the time being, but may raise them depending on what the Minister says. Confusion of roles is implicit in the arrangements for the Financial Stability Committee set out in the Bill. The Select Committee in another place explored these issues and made a number of recommendations, but the government proposals in the Bill still lack clarity. I am sure that the Government need to look at this again. I beg to move.

Lord Higgins: I have much sympathy with my noble friend's view. Why is there any need to have all of this in statute, unless it is in some sense to hive off responsibility from the Chancellor of the Exchequer and the Treasury and onto the Bank of England, in the same way as the Government sought to do with the Monetary Policy Committee? The Bill specifies in minute detail exactly what the membership is and the extent to which the FSA and the Bank are represented, and then it specifies in particular that the Treasury shall not have a responsibility in this matter but only a consultative role. I am not happy about the way in which the body is being set up. It seems unnecessary to be so specific in statute.

Lord Myners: I am saddened at my apparent mishandling of this section on the Financial Stability Committee. For the noble Baroness to suggest that this is linked to an act of stupidity of the greatest magnitude she has seen and for me to fail to convince my noble friend Lord Eatwell of the Government's case is clearly a failure on my part. As regards my noble friend's earlier observation about the speaking note, it may be prepared by a number of people, but I have checked it and, therefore, I take entire responsibility for what he regards as a mishmash of inconsistent observations. I will seek on Report, if necessary, to be more coherent than I appear to have been.
	The amendments in this group tabled by the noble Baroness, Lady Noakes, would establish the Financial Stability Committee in a way that mirrored the structure and appointment provisions of the Monetary Policy Committee. Of course, there are arguments to be made in favour of different governance models, and all have their merits. However, as I will explain, we have set out the right model in the Bill, one that reflects the Bank's enhanced responsibilities for financial stability, alongside its other roles.
	As set out in the Bank of England Act 1998, the Court of Directors is responsible for the affairs of the Bank. It is essentially the Bank's board and high-level governing body. Both the Bank's executives—including the governor—and its committees ultimately report to the court, and it is from the court that responsibilities are delegated, other than those in the area of monetary policy. It is therefore entirely right that the Financial Stability Committee, which will advise on the development of the financial stability strategy and actions to be taken under the financial stability-related powers given to the Bank through the Bill, should be a sub-committee of the court and accountable to it. Financial stability strategy and its implementation will be central to the Bank's operation and functions and will, on some occasions, affect its balance sheet and overall risk analysis, as recent events have demonstrated. It is therefore right and proper that there is a strong and direct relationship between the new committee and the court.
	Ultimately, both executive actions and the committee as a whole are rightly accountable to the court for their performance, but neither the governor nor the committee will take all decisions relating to financial stability. Some are bound to be matters for the court, and that is right. As I have said, financial stability is an integral part of the Bank's responsibility, and, as the court is ultimately answerable—to Parliament, as well as others—for the actions of the Bank, it is right that it retains a direct line of responsibility in that area of work. This is not dissimilar to the situation in public companies, where responsibility for audit and remuneration may be delegated to a sub-group drawn from what the noble Lord, Lord Turnbull, might describe as a limited gene pool, namely the board of directors. It is, nevertheless, a sub-committee of the board: it is accountable to the board and takes its powers from the board.
	We want the committee to be at the heart of matters relating to financial stability in the Bank, not at the fringes, and to meet as frequently as it considers necessary to fulfil its functions and bring executives and non-executives together to maximise their respective expertise and knowledge and ensure that the Bank as a whole can fulfil its statutory responsibilities effectively. As I stated earlier, I respectfully recognise that there are arguments in favour of different governance models. Clearly, I have failed the Committee in not explaining those with conviction, but some of them have been eloquently elucidated by the noble Baroness. I hope that she and the Committee will consider satisfactory my explanation of why the Government's model is appropriate for this committee.
	I shall answer some of the questions raised. This committee will effectively replace the Financial Stability Board. I speak from personal experience, having recently been a member of the court of the Bank of England, fighting hard to persuade the governor and the executive that the independent members of court should at least be able to attend if not speak at the Financial Stability Board. The Financial Stability Board was simply not empowered enough to do the role that is required to fit with the Bank of England's new statutory responsibility for financial stability. I believe that I have answered the point that the noble Lord, Lord Turnbull, would have made here. We may be selecting from a limited gene pool, but there is no reason why non-voting members may not be co-opted to the Financial Stability Committee if that were the wish of the committee.
	The noble Lord, Lord Higgins, asks why this is in statute. The answer is that it underlines the statutory responsibility that the Bank of England and the Financial Stability Committee will now have for financial stability. Is the arrangement too prescriptive? It possibly is. As I said earlier, there is no perfect model for governance. My noble friend Lord Eatwell observed that there were arrangements for voting and that that was evidence that we had just taken the Monetary Policy Committee rules into the proposed Financial Stability Committee. I agree with him that most decisions by this committee will be made around debate and discussion, and conclusions will emerge. They will be qualitative rather than quantitative decisions. That also applies to a board of directors. Every company on whose board I have sat has, in the articles of association, spelt out the voting rights, should there ever be a situation in which a vote is required. This approach is a pragmatic one, drawing on the experience of other governance models but ensuring that we have a group at the heart of the Bank who are responsible for financial stability, drawing together appropriate skills from within the Bank and, if necessary, from outside, with a balance of executive and non-executive members.
	I urge the noble Baroness to withdraw her amendment, and I hope that, on this occasion, I have not appeared to be stupid.

Baroness Noakes: Can the Minister explain why the senior executive directors with responsibility for financial stability are excluded from the group? It might help the Committee if he could also explain how the Government see this committee working. He was at pains to emphasise that this group would be at the heart of the bank, yet it is to have four non-executive members of court on it. If it is at the heart of the bank, does that mean it will meet often? Will non-executive members of court become semi-executive, in the way that MPC members become virtually full-time? It is a little unclear how the Minister sees this. He seemed to articulate a strong, active and ongoing role involving non-executive members, but was simultaneously trying to position it within court and the kind of things that remuneration and audit committees do. Remuneration and audit committees meet, in the ordinary course of things, perhaps four times a year—probably not much more that that unless there is a real problem. Can the Minister say more about how this committee will look when it is working?

Lord Myners: The noble Baroness has raised two questions. I shall seek to answer both with clarity.
	First, the executive director of the bank responsible for financial stability reports to the deputy governor responsible for financial stability. Therefore, the most senior executive director in the bank, reporting to the governor with responsibility for financial stability, will be on the Financial Stability Committee. Secondly, the frequency of meetings of the Financial Stability Committee will be for the committee to determine and will, to some extent, be driven by events. However, I imagine that the committee will take up a considerable amount of time. In the specification for recruiting new members of court, which is a matter of public record, we made it clear that members of court who sit on the Financial Stability Committee are likely to have to commit additional time. From recollection, I think we have talked about two days per month for members of court and three to four days per month for members of court who will sit on the Financial Stability Committee. I hope that I have answered the noble Baroness's question fully and ask her to withdraw her amendment.

Baroness Noakes: The Minister has certainly given us more information about the committee. I am still confused about how it is supposed to be positioned within the bank, but there are more important issues to be dealt with involving the Financial Stability Committee on Report. I shall consider whether to continue with this on Report, and there are certainly more issues that we need to consider this evening.
	Amendment 179 withdrawn.
	Amendments 179A to 185 not moved.
	Amendment 186
	 Moved by Baroness Noakes
	186: Clause 228, page 112, line 7, leave out from first "to" to "implementation" in line 8 and insert "decide upon the"

Baroness Noakes: Moving on from the composition and positioning of the Financial Stability Committee, I come to its role. I also speak to the other four amendments in the group, which are probing amendments to new Section 2B of the Bank of England Act 1998, which would be inserted by Clause 228.
	New Section 2B(2) has a mix of functions ranging from making recommendations to giving advice on the use of the stabilisation powers—although it does not say to whom advice is to be given—and the monitoring of the use of those powers, as well as the monitoring of the Bank's interbank payments systems regulation. It is really something of a ragbag.
	For the purposes of today's debate, Amendments 186, 188 and 189 have merely changed those three proposed provisions concerning recommendations to the court or the unspecific giving of advice, as set out in paragraphs (a) to (c) of new Section 2B(2), into provisions of decision-making.
	An alternative, overlapping amendment deletes both subsections (2)(b) and (2)(c) of new Section 2B. I am unclear to whom advice should be given and on what basis so I have deleted them for lack of clarity. If the committee is chaired by the governor and both the deputy governors are on it, it is difficult to see to whom the committee will give advice. Where is that advice going to be given? I have deleted those two paragraphs on that basis.
	The amendments do not avoid a problem with the current draft which has the committee both monitoring the use of the stabilisation powers in subsection (2)(d) of new section 2B and also advising on their use in new subsection (2)(c). This seems to create an unnecessary conflict. Amendment 190 would delete new subsection (2)(d) on the basis that the committee cannot do both. An alternative may be to give the committee responsibility to monitor all of the functions mentioned in new Section 2B(2).
	This links to the question of who sits on the Financial Stability Committee and how much time they are expected to spend on it. We debated this on the previous group of amendments. What precedents has the Treasury drawn from in devising the Financial Stability Committee? I remind the Committee that the Treasury does not have a good track record in corporate governance innovation. It was the Treasury that invented the non-executive committee in the 1998 Act. Almost as soon as the Act had passed, the court was devising ways to work as normally as possible whatever the Act said, culminating in the 2003 decision for the chairman of the non-executive committee to chair the court on a de facto basis. This Bill unwinds quite a bit of the 1998 experiment and we should remember that. I beg to move.

Lord Myners: This group comprises various amendments, which I will address in turn. The general thrust is to seek to give the Financial Stability Committee a more executive role. I shall first set out why it would be inappropriate for the FSC to be purely or even primarily an executive committee.
	It is entirely right that the executives of the Bank, headed by the governor, retain responsibility for operational decisions around the Bank's financial stability responsibility. On a purely practical level, while I would expect the FSC to meet as often as it considers necessary, it would not be realistic to expect a committee of this sort to meet with the frequency required in a fast-moving emergency situation. The FSC will provide a key source of financial stability expertise, together with bank executives responsible for advising on and implementing the SRR. It will make recommendations to the Bank—which will take these seriously. The Government believe that the FSC will prove an invaluable sounding board and source of expert advice to the Bank, which will assist it in taking decisions which will contribute to achieving the Bank's financial stability objectives. In my experience, this will be a significant improvement on the existing financial stability board arrangement.
	Amendment 186 would make it a function of the Financial Stability Committee—presumably rather than the Court of Directors—to decide how the Bank should implement its financial stability strategy. Amendments 188 and 189 would give the FSC ultimate responsibility for taking decisions related to the Bank's use of the SRR stabilisation powers, including those in respect of individual institutions in the SRR. These changes would make the Financial Stability Committee the executive decision-maker, which for the reasons I have just given would be too direct an executive role for the committee as it has been designed.
	I recognise that the noble Baroness has almost certainly tabled these amendments with the example of the Monetary Policy Committee in mind. While the Government of course intend the new committee to be as successful as the Bank's Monetary Policy Committee, there are a number of significant differences between the roles and functions of the committees. These explain why the approach to the FSC adopted in the Bill differs from that taken in respect of the MPC.
	The Monetary Policy Committee was set up as an independent committee of the Bank of England to ensure that decisions about interest rates were taken entirely independently of any political interest or influence. This operational independence is made possible by the fact that the MPC's role, under the Bank of England Act 1998, is to take decisions over the use of one lever—control of the price of money, or interest rates—to achieve one main objective, the maintenance of price stability, while supporting the Government's economic policies.
	The MPC therefore has a very clearly defined remit to undertake a very specific role, and it has the appropriate specialist expertise to do so. However, the situation regarding financial stability is entirely different. Operational decisions in relation to actions that the Bank may carry out to safeguard financial stability cannot, and should not, be taken in isolation from the Bank's executive and court. It is essential that decisions in relation to, for example, the SRR and wider financial stability issues are taken having regard to a wide range of economic considerations within the tripartite framework.
	Implementation of the financial stability strategy involves many of the Bank's functions and has implications for the Bank's balance sheet and risk and control environment, as recent events amply demonstrate. It would not be appropriate for vital strategic decisions regarding an important part of the Bank's activities to be delegated to a sub-committee of the Court of Directors while the full court remained responsible under the Bank of England Act 1998 for the "affairs of the Bank". I hope that noble Lords can see that a model in which a committee made executive decisions on the support of institutions, and on lending and collateral, in isolation from the court would be wholly incompatible with the Bank's governance and accountability structure.
	Amendment 187 has almost the opposite effect of the previous amendments. It would entirely remove the FSC's advisory role in the Bank's decision-making in respect of the use of the stabilisation powers conferred on the Bank under the SRR. I do not understand how this outcome could be desirable, as it is precisely in the area of giving such expert advice that we consider the FSC can offer the most value.
	Amendment 190 would remove the FSC's role in monitoring the use of the Bank's stabilisation powers. Of course, if the committee were taking the decisions—as proposed by the noble Baroness with her Amendments 186, 188 and 189—this provision would not be needed, but omitting it highlights that the model proposed by the Government contains more appropriate checks and balances than this alternative executive committee model.
	It is not at all clear how the noble Baroness intends to ensure that the executive FSC that she proposes is held accountable for the decisions that it takes, nor what role the executive of the Bank would have in a world where responsibility for taking operational decisions in regard to financial stability was taken away from it.
	The noble Baroness's amendments would simultaneously remove executive power from where it rightly belonged—with the governor and the rest of the Bank's executive—while removing the ability of the Court of Directors to ensure adequate levels of accountability for any decisions taken. For these reasons, I invite her to withdraw the amendment.

Baroness Noakes: The Minister responded on the basis that I was proposing an executive committee, but I thought that I had tried to explain that, for the purposes of today's debate, I was producing a version of what the committee might do to replace the ragbag in new subsection (2).
	The Minister stressed the role of the court in overseeing the work of the Financial Stability Committee. Can he explain how the court can effectively oversee the work of the committee when a majority of the court's members are on that committee?

Lord Myners: In precisely the same way as a board of directors oversees the work of a remuneration and nomination committee in a plc. All members of such committees tend to be drawn from the board.

Baroness Noakes: That is absolutely right, but it is not the case that a majority of the members will be on those committees. It would be rare to find anything approaching a majority on those committees whereas here we have a court which has the three governors and nine non-executives. The three governors go off with four of the non-executives leaving five behind. Somehow when they all come back together the court is supposed to be capable of overseeing this. I do not understand that.

Lord Myners: My experience is that it is now increasingly the custom and practice on plc boards that a majority of non-executive directors, and frequently all the non-executive directors, comprise the audit committee, so the parallel is identical.

Baroness Noakes: We can argue about what practice is emerging in the private sector, but that is for another day. I was about to ask the Minister to explain how the committee could both monitor the use of the Bank stabilisation powers as well as give advice under new subsection (2)(b) and (c). I do not see how those functions can sit well together. Is the committee monitoring the Bank's executives and giving them advice, or is it giving advice and monitoring itself?

Lord Myners: The noble Baroness has denied me the right to reach out to plc for yet another precedent. Boards of directors of companies and charities are engaged in providing advice, facilitating the formation of decisions, challenging recommendations coming from the executive and monitoring implementation. It will be a properly effective body comprising high-quality executive directors—the Bank of England has always had the good fortune of recruiting people of extraordinary talent and ability—and independent directors of the court. I believe that such a body would have no more difficulty in combining the role of advice and monitoring than would be the case with the trustees of an endowment, the board of directors of an NGO or the board of a non-plc.

Lord Oakeshott of Seagrove Bay: Will the Minister accept from these Benches that what he states as the normal current practice of plcs is correct? I wonder whether he will accept through me the advice to the noble Baroness, Lady Noakes, that perhaps she has spent a little too long in this House and not enough time keeping in touch with what is going on in the private sector. If she had, she would know that that is the normal current practice.

Lord Myners: I welcome the intervention of the noble Lord, Lord Oakeshott. However, I have considerable respect for the noble Lady's breadth of experience in the private sector, in the professional world and in the world of public policy in government. I recognise and respect that she was regarded as an extraordinarily good member of the court of the Bank. She was a member before I joined the court so we did not overlap. I have no doubt that the noble Baroness brings great experience and wisdom to her contributions and that we can continue at times respectfully to agree to disagree, but to do so courteously and constructively.

Baroness Noakes: We have probably taken this group of amendments as far as we can this evening, and I shall consider carefully what the Minister said. I remain of the opinion that the construction of the Financial Stability Committee, its relationship to the court and its composition altogether make up something of a dog's breakfast. Perhaps we can do something about that on Report. I beg leave to withdraw the amendment.
	Amendment 186 withdrawn.
	Amendments 186A to 192B not moved.
	Amendment 193
	 Moved by Baroness Noakes
	193: Clause 228, page 112, line 29, at end insert—
	"2BA Financial Stability Committee: publication of minutes of meetings
	(1) After each meeting of the Financial Stability Committee, the Bank shall publish minutes of the meeting before the end of the period of 6 weeks beginning with the day of the meeting.
	(2) Subsection (1) shall not apply to minutes of any proceedings relating to the matters within paragraphs (a) and (b) of subsection (2) of section 2B unless the Committee has decided that publication would not be likely, or would no longer be likely, to result in a threat to financial stability.
	(3) Publication under this section shall be in such manner as the Bank thinks fit."

Baroness Noakes: Amendment 193 requires the publication of the minutes of the Financial Stability Committee by inserting a new Section 2BA into the Bank of England Act 1998 via Clause 228 of the Bill. The Bill is silent about the workings of the Financial Stability Committee, yet its deliberations will be important to all those working in the financial services industry and more widely. It is unusual to require the workings of a board committee to be made public, but the Financial Stability Committee, as conceived by the Government, appears to be an unusual board committee as it underpins one of the Bank's primary functions.
	My amendments have a strong connection with the arrangements of the Monetary Policy Committee, which publishes its decisions and minutes, but the arrangements suggested are not the same as there is an important override in that the minutes do not need to deal with matters that threaten financial stability. In that way, we can avoid the FSC being part of the problem instead of part of the cure. I know that the Chancellor of the Exchequer has said in the past that the proceedings of the Financial Stability Committee will be published, but he has been unspecific about that, and there is nothing to compel the Bank of England to honour that commitment to transparency. I hope the Government will confirm that they are committed to transparency and that the Bill will be improved to reflect that. I beg to move.

Lord Eatwell: In this case, the noble Baroness has taken the analogy with the Monetary Policy Committee a little too far. I quite understand that in proposed new subsection (2) she rules out matters that might, as she put it so well, be part of the problem; none the less, the nature of the deliberations of the Financial Stability Committee are unlikely to arrive at definitive conclusions, unlike the Monetary Policy Committee, whose conclusions are announced immediately, so that the minutes simply reflect the rationale behind them. It is likely that the deliberations of the Financial Stability Committee will involve a lengthy development of strategy and tactics to deal with particular issues, and the publication of minutes, even given the qualification that the noble Baroness has put forward in proposed new subsection (2), could later, unexpectedly, create problems. It would be inappropriate to require such publication on the timescale that the noble Baroness proposes. An annual report would be much more appropriate.

Lord Newby: I, too, think that although, in general, greater openness is a good idea, in this case it does not really work. The noble Baroness has already excluded from the minutes the functions of the committee under paragraphs (a) and (b). I am slightly surprised that she has not included paragraph (c), as issues about how the Bank might use its stabilisation powers are bound to be specific to individual institutions. In any event, unlike the Monetary Policy Committee, which meets with metronomic regularity every month, it is envisaged that the FSC will meet, sometimes at very short notice, to deal with immediate problems informally and may meet several times a day. It is not the kind of body with which the publication of minutes sits.

Lord Myners: I am grateful for the contributions to this debate by my noble friend Lord Eatwell and the noble Lord, Lord Newby. The comments made by the noble Lord, Lord Newby, captured the essence of how this committee may operate in practice. That is why I respectfully suggest that this amendment, which again seems to use the Monetary Policy Committee as a precedent, is not appropriate. We cannot simply transpose the success of the Monetary Policy Committee into the architecture and processes of the Financial Stability Committee. The decisions discussed at meetings of the Monetary Policy Committee are highly market-sensitive until they are announced. However, once the decision is in the public domain, the grounds for making it can usually be disclosed in full.
	The case of financial stability is very different. The grounds for making decisions about one institution or sector will often reflect the committee's assessment of other institutions and sectors, and of the system as a whole. Noble Lords will recognise that publication of such material could be highly destabilising, whether six days, six weeks or six months after the fact. It is difficult to understand how the noble Baroness could conclude that the publication of these minutes would achieve a goal of transparency without compromising the effectiveness of the committee, which should be our primary consideration.
	The amendments seek to address some of these points by allowing the committee to exclude from publication minutes regarding decisions on the use of the stabilisation tools in the SRR. However, there is no similar carve-out for the FSC's other roles. Would noble Lords, for example, consider a discussion of the robustness and stability or otherwise of a payment system such as BACS or CHAPS, on which millions of people rely every day, to have less potential to threaten financial stability than a similar discussion regarding a bank? I think not.
	What of any additional functions that the court may delegate to the FSC? Representatives of the Bank of England have signalled in the other place that they are considering delegating to the FSC responsibility for decisions regarding liquidity support. Would it be appropriate to publish minutes of these issues? I think not. It is clear that the Bank would not be able to publish these deliberations without fear of causing a run on a financial institution. Surely that cannot be the noble Baroness's intention. There are measures later in this part of the Bill that are designed to prevent instances of potentially damaging premature disclosure of liquidity support.
	For the sake of argument, let us suppose that it would be possible and desirable to expand the carve-out in the amendment to cover these and other cases. Even if this were possible, we would still oppose the publication of minutes for the following reasons. First, it is vital that the committee feels able to speak freely on issues without the threat that the minutes may be published at some point in the future. Any possibility of the detail of discussions entering the public domain would inevitably compromise the honesty and comprehensiveness of any debate, or record thereof.
	Secondly, it would be very difficult for the committee to assess the potential impact on financial stability. The issues discussed may subside for a time, and the committee publish the minutes, confident that they pose no threat to stability. If the issues were to re-emerge, market reconsideration of the committee's minutes, and any subsequent reaction, could pose a risk to financial stability.
	Finally, the mere fact of the committee's ceasing to publish minutes of its meetings after a period of consistently making them available would send a clear signal to the market that there was some threat to the stability of the financial system, which is exactly what we are trying to avoid.
	The Monetary Policy Committee meets on a formal schedule. The dates of the MPC's meetings for the next 12 months are already a matter of public record. It is an entirely different committee, with an entirely different set of processes, from the Financial Stability Committee. To borrow the rules, procedures and processes of the MPC for the Financial Stability Committee shows a failure to appreciate fully how the FSC would work. I beg the noble Baroness to withdraw her amendment.

Lord Eatwell: My noble friend said one thing that disturbed me a little as an academic. He said that these minutes would never be published. Surely, in due course they will be made available to economic historians under the 30-year rule.

Lord Myners: I am tempted to take advice from officials on whether financial stability might still be an issue 30 years after it was first discussed in relation to a specific case. However, I think that I can chance it and give my noble friend a clear and convincing "yes" in answer to his question.

Baroness Noakes: I thank the Minister for his response. I understand that the Chancellor of the Exchequer has said that the proceedings of the Financial Stability Committee will be published. Part of the purpose of my amendment was to see what that might mean in practice since the Bill contains nothing about publication.

Lord Myners: Perhaps the noble Baroness would assist the Committee by giving reference to the source of this quotation.

Baroness Noakes: I do not have a reference with me, but I am sure that I can find it later and let the Minister know. Is he saying that the Government's position is that minutes should never be published?

Lord Myners: Subject to the caveat in answer to the question asked by my noble friend Lord Eatwell, that is correct. However, I remind the Committee that the Bank of England will continue to publish twice a year its report on financial stability. That will no doubt be informed by the work of the Financial Stability Committee, although it will not disclose the most price-sensitive issues which that committee will discuss. But I believe that there will be public dissemination of the thinking of the bank on issues of financial stability, which is informed and influenced by the work of the Financial Stability Committee and as reflected in the six-monthly report on financial stability published by the Bank.

Baroness Noakes: I hear what the Minister has said and I will consider carefully what he has communicated. I will seek to re-source my Chancellor of the Exchequer quotation and let the Minister know. If I can, I may return to this on Report. If not, I may not. I beg leave to withdraw the amendment.
	Amendment 193 withdrawn.
	Amendment 194
	 Moved by Baroness Noakes
	194: Clause 228, page 112, line 33, leave out "with the Bank" and insert "in relation to any person or matter"

Baroness Noakes: In moving Amendment 194 I shall speak also to Amendment 195. These amendments concern the conflict of interest provisions set out in proposed new Section 2C(2) of the Bank of England Act 1998 which would be inserted by Clause 228.
	Conflicts of interest are dealt with by proposed new subsections (2) and (3). New subsection (3) provides that where a question "touches or concerns" a member, he must not vote but must withdraw from the meeting and be absent from the debate. However, new subsection (2) applies a rather different rule in relation to a member's "dealing or business" with the Bank if it,
	"falls to be considered by the Committee".
	There the member,
	"has to disclose his interest",
	but might vote and take part in the proceedings if the committee agrees that it,
	"does not give rise to a conflict of interest".
	I struggle to see why there are two rules in the Bill and why they are expressed differently. I am unclear what "dealing or business" with the Bank might be envisaged to be discussed with the committee if they are not also matters which touch or concern the member.
	Furthermore, new subsection (3) is drafted in respect of the interest of a member but not with the qualification "direct or indirect", as in new subsection (2). Yet I imagine that if the Financial Stability Committee has, say, directors from a major financial institution on it, any conflicts would be not direct personal conflicts but indirect conflicts arising through the institution with which they are associated.
	I am sure that the avoidance of conflicts of interest is very important. In that context, I wonder whether the Minister can explain how the Government think that they will find people with knowledge and experience of the financial sector who do not have conflicts of interest, at least indirectly. If the failure of a major institution were in prospect, would there be a single active member of the City who did not have some form of conflict of interest via their own institution, or is it expected that the Financial Stability Committee will simply become a home for retired members of the financial services business?
	My amendments seek to replace the concepts of "dealing or business" with the Bank with,
	"in relation to any person or matter",
	in order to broaden subsection (2); and to remove subsection (3), which is unnecessarily narrow. There could be other ways of dealing with the issues but, for today, I beg to move.

Lord Davies of Oldham: I propose to deal first with the more difficult amendment—Amendment 195, with which we disagree—but hope to give the noble Baroness a better response to Amendment 194.
	In appointing court members the Government will seek to ensure that the appropriate mix of skills are available to the court as a whole, including the Financial Stability Committee. The process of recruitment, which is already under way, is being run in accordance with the commissioner's code of practice, regulated by the Commissioner for Public Appointments and overseen by an accredited independent assessor. It is vital in deciding the membership of the Financial Stability Committee to maintain a balance between ensuring that members have relevant expertise and experience of financial markets and the importance of avoiding damaging conflicts of interest, as the noble Baroness emphasised.
	Under the Bank of England Act 1998, non-executive members of the court can be active participants in the financial markets as long as they declare any possible conflict of interest and absent themselves from any decision that may produce a conflict. It has of course been suggested—the noble Baroness emphasised this—that current market participants should be excluded from membership of the FSC. I can understand the reasoning behind this because the issue of conflict of interest has become sharper. However, the Government consider that members of the FSC need to have more relevant market experience, not less, than current members of the court in order to give effective advice on the Bank's activities in pursuit of financial stability. If we excluded active market participants from being members of the FSC it would simply unacceptably limit the pool of talent from which we could appoint directors to the court and the FSC.
	I recognise that this is a matter of balance. I can reassure the Committee that both the Treasury, when appointing members of the court, and the chair of the Court of Directors. when deciding the membership of the Financial Stability Committee, will seek to limit the probability of conflicts of interest as much as possible. It is clearly in no one's interest if several members of the FSC have repeatedly to absent themselves from vital discussions and cannot vote. I am confident that the chair of the Court of Directors will do whatever he can to avoid this while ensuring that the members of the FSC have sufficient relevant knowledge and experience to support effectively the executive in taking action to protect what we all regard as a very important objective, the UK's financial stability.
	I hope that I have explained the reasons why we have decided to impose the same restraints on the members of the Financial Stability Committee as those that exist already for current members of the court. They must declare any direct or indirect interest in any dealing or business which could potentially produce a conflict. If the FSC considers that a conflict of interest could occur, the member involved will have no influence or vote on the matter. I hope the noble Baroness will at least give credit for the fact that the Government have thought about these issues very seriously. She believes that it will be difficult to recruit people under these criteria, and so it may be, but our objective is to achieve the appointment of people, particularly to the FSC, who have this crucially relevant experience.
	I substantially agree with the noble Baroness on Amendment 194—this is the first time today that I have been able to express such sentiments. However, we recognise the points that she makes. As she pointed out, it is not only in relation to the Bank that a member of the community may or may not have a direct or indirect interest that could be discussed in the committee; the committee may discuss a range of subject matters in respect of which it would clearly be appropriate for a member to disclose his interest—for example a shareholding in a banking institution in relation to which the committee was considering an exercise of the special resolution regime powers.
	I am grateful to the noble Baroness for Amendment 194 because it highlights the way in which the current wording excessively limits what might be considered a conflict of interest for the purposes of the Financial Stability Committee. Although I cannot accept her amendment as it stands—that would be going a little too far even at this time—we agree with the sentiments behind it. On Report I shall bring forward an amendment that addresses this point in line with her thinking. I hope that she considers that a recognition of our joint constructive work on the Bill.

Lord Eatwell: My noble friend's remarks on Amendment 195 are enormously important. The commitment to have practitioner members as active members of the FSC, and indeed of the court, is very important. I was a member of the board of the old Securities and Futures Authority, which had a majority of practitioner members. I was enormously impressed by the knowledge, effectiveness and commitment of my fellow members of the board. I believe that that could be replicated in the court and in the Financial Stability Committee.

Lord Davies of Oldham: I am grateful to my noble friend for that insight. I fully appreciate that he brings academic detachment in supreme measure to his considerations when working in this context. However I also recognise, as does he, that it is possible for us to look for people who are able to play a very significant role in this work while at the same time not being constantly racked by the issue of conflict of interest.

Baroness Noakes: I am grateful for the Minister's comments on Amendment 194. I look forward to seeing the Government produce something on Report to that effect. When that is produced the Government may like to explain what marginal difference will remain between proposed new subsections (2) and (3), because I am less than clear that subsection (3) remains necessary if subsection (2) is drawn up in a satisfactory way. For example, if subsection (2) says what I think the Minister and I think it should say, then it is difficult to see why subsection (3) should be another layer on top of that. If there is a conflict, what is wrong with the process in subsection (2), and why do we need a separate process in subsection (3)? I leave the Minister to ponder on that before Report. I beg leave to withdraw the amendment.
	Amendment 194 withdrawn.
	Amendments 194A and 195 not moved.
	Amendment 196
	 Moved by Baroness Noakes
	196: Clause 228, page 112, line 45, leave out from beginning to end of line 5 on page 113

Baroness Noakes: I hope that I can deal quickly with this amendment. It would delete subsection (4) of proposed new Section 2C of the 1998 Act inserted by Clause 228. This subsection allows the committee to delegate its functions. The FSC is not a large body, but the matters which it considers are inevitably very important. The noble Lord, Lord Myners, who is no longer in his place, described this as being at the heart of the Bank. It is difficult to see how the matters included in subsection (2) of proposed new Section 2A would not be important. To that extent, I cannot see that it would be necessary for a sub-committee of the court further to divide itself. What sort of things are envisaged, and why is it necessary to have a sub-committee of what we were told would be a pretty high-level committee intended to advise the governor and executive directors of the Bank on financial stability matters? I beg to move.

Lord Davies of Oldham: We thought that the two provisions were relatively uncontroversial but the noble Baroness wants me to comment on the two subsections. The first, subsection (4), allows the Financial Stability Committee to delegate any of its functions to two or more of its members, other than the Treasury representative and co-opted non-voting members. The intention is to allow the committee, in effect, to nominate two of its members, either executives, non-executives or a combination of both, to fulfil one of its functions. This could be used, for example, if the committee wished something to be done in relation to which particular members had special expertise. In this case, the committee could delegate the task to any two or more individual members.
	For example, imagine the case of the partial transfer powers being used by the Bank of England in respect of a particular bank. This provision would allow the committee to delegate to two or three members the function in new Section 2B(2)(d), proposed in Clause 228, of monitoring the Bank's use of the stabilisation powers to resolve the failing bank. These two or three members then monitor the transfer of the Bank and any decisions and actions taken in respect of the resolutions; gather information on the Bank's actions in respect of bank X; and consider the effectiveness and appropriateness of any action taken. The members could then go back to the full committee and report their findings. I readily accept that it is unlikely that the committee will need to use this mechanism on a regular basis, but I see no reason why we should not enhance the committee's flexibility by including this option in the Bill.
	Subsection (5), which this amendment would also delete, would insert a new subsection into the Bank of England Act 1998, clarifying that the court's role of managing the Bank's affairs, including its strategy and financial management, should be subject both to the Bank's existing objectives—relating to monetary policy, as set out in Section 11 of the 1998 Act—and the Bank's new financial stability objective, set out in subsection (1) of this clause. This is a logical and straightforward provision, which merely clarifies that the court's management of the Bank's activities should be subject to its dual statutory objectives. I hope the noble Baroness will feel that I have justified the two provisions and feel safe in withdrawing her amendment.

Baroness Noakes: I think the Minister has told me that the new clauses have been drafted by bureaucrats for bureaucrats. I am sure he has explained that as well as he is able. I beg leave to withdraw the amendment.
	Amendment 196 withdrawn.
	Amendment 197
	 Moved by Baroness Noakes
	197: Clause 228, page 113, line 5, at end insert—
	"( ) At the end of section 4(2) of the Bank of England Act 1998 add—
	"(c) a report by the directors of the Bank on the matters for which the sub-committee constituted by section 2B is responsible.""

Baroness Noakes: I move Amendment 197 which inserts a new subsection into new Section 2C of the Bank of England Act 1998, inserted by Clause 228. Earlier we debated the issue of making public the minutes of the Financial Stability Committee. This amendment is on the same theme of transparency, but is about reporting publicly on how well the Financial Stability Committee is doing. Under the 1998 Act, there is a sub-committee of the non-executive directors of the Bank, which is given certain functions by Section 3 of the Act. Section 4 of the Act requires the annual report of the Bank to include a report on the matters for which the sub-committee is responsible. My amendment mirrors the arrangements for the non-executive sub-committee and requires a report within the Bank's own report on the matters for which the Financial Stability Committee is responsible. It does this by inserting a further reporting requirement into Section 4 of the Act.
	The amendment requires the non-executive members of court to make this report. This would involve the inevitable problem that some of the non-executive members are on the Financial Stability Committee and some are not, to which I referred earlier. Some would be reporting on their own work, which is always undesirable. The confusion could be made complete by requiring the court as a whole to report on the work of the Financial Stability Committee, thus drawing in the governor and the deputy governors. Alternatively, the report could be made by the Financial Stability Committee itself or, more neutrally, by the Bank. None of this is perfect because of the rather curious status of the Financial Stability Committee and its membership, but the aim of the amendment is transparency and not organisational tidiness. Any formulation would therefore satisfy me as long as there was an annual report. I beg to move.

Lord Davies of Oldham: The noble Baroness suggested on the previous amendment that I was subject to bureaucratic priorities; on this one, I share her objective, which is not bureaucracy, but openness. I therefore have some sympathy with her amendment.
	It is not necessary to place a statutory requirement on the Bank of England to publish an annual report on the matter for which the Financial Stability Committee is responsible—that is, financial stability—because the Bank of England already produces a report on it. Since 1996, the Bank has published a half-yearly Financial Stability Report, which aims to identify the major downside risks to the UK financial system and thereby help financial firms, authorities and the wider public in managing and preparing for them.
	The Bill, and Clause 228 in particular, seeks to strengthen and enhance the Bank of England's role in protecting the stability of the UK's financial system. I would expect the Bank, in the light of this greater remit, to provide even further information in the bi-annual report. It is not particularly helpful, however, to state in the Bill to whom and how often the Bank must make a report on its activities in this area. A general requirement already exists for the Bank to make an annual report, which includes a review of its performance in relation to its objectives and strategy, under Section 4(3) of the Bank of England Act 1998. I share the noble Baroness's view on the importance of transparency. If the provisions were not already present in legislation, I would accept her amendment. However, I hope that she will accept that it is unnecessary because the provisions are already there and that she can feel confident in withdrawing it.

Baroness Noakes: The provisions are not already there. There is no requirement in the Act as amended by the Bill for the Bank to report on the work of the Financial Stability Committee, and the Financial Stability Report is not required by statute. I am mystified by what the Minister is saying.

Lord Davies of Oldham: The Bank has to give a report on its responsibilities. The enhanced role of the Bank with regard to financial stability will oblige it to report on that in its annual report.

Baroness Noakes: Given that the Bank is required in Section 4 to report not just on its activities but on the independent directors' committee's responsibilities, would it not be very odd for there not to be a similar reporting requirement for the Financial Stability Committee, to reflect its importance within the context of the Bank?

Lord Davies of Oldham: I do not accept that point. The Bill enhances the responsibility of the Bank of England in this crucial area. The Bank is provided with structures which fulfil its obligations. It has to report on the role which it plays, particularly its key obligations. It will report on these matters as one of its key obligations. As there is a provision for an annual report, I have great difficulty in understanding why an additional report is necessary.

Baroness Noakes: I have explained that it is because the 1998 Act specifies the report of one of the sub-committees and we now have an even more important sub-committee—a much more important sub-committee of the court than the independent committee of directors could ever be—and yet there is no specific reporting requirement. I would like to test the opinion of the Committee.

On Question, whether the said amendment shall be agreed to? (Division on Amendment 197.)
	Their Lordships divided: Contents 10; Not-Contents 31.

Resolved in the negative; Amendment 197 disagreed.
	Clause 228 agreed.
	Amendment 198
	 Moved by Baroness Noakes
	198: After Clause 228, insert the following new Clause—
	"Debt: assessment of adequacy of resources
	After section 2C of the Bank of England Act 1998 (Financial Stability Committee: supplemental) as inserted by section 228 above insert—
	"2D Debt: assessment of adequacy of resources
	(1) The Financial Stability Committee must write to the FSA twice a year, setting out its assessment of financial stability and the FSA must have regard to that assessment in the exercise of its duties in respect of paragraph 4 of Schedule 6 to the Financial Services and Markets Act 2000 (threshold conditions: adequate resources).
	(2) The Financial Stability Committee must publish its letter and the FSA must publish its response.""

Baroness Noakes: Amendment 198 introduces a new clause after Clause 228, and deals with a problem that we see as having emerged following the removal of banking supervision from the Bank of England. Before that supervision went to the FSA, the Bank had an overview of the financial and banking system as well as responsibility for supervising individual institutions. That meant that the organisation could utilise the information gathered in its broader role for its more specific role. In particular—and this is the focus of my amendment—the Bank had an overview of debt in both the economy and the banking system. Had it had concerns about levels of debt, or leverage in the banking system, those could have been fed back via the institution's specific activities.
	When the FSA took on banking supervision, that essential link between macro-analysis and micro-action disappeared. Despite not only the cross-membership between the boards of the Bank and the FSA, but the existence of the tripartite arrangements, the publication of the financial stability report, and so on, there was no linkage made between the Bank's analysis of debt and leverage and the FSA's determination of capital adequacy ratios. That was clear, inter alia, from the FSA's handling of Northern Rock, whose regulatory capital requirement was reduced only weeks before its collapse.
	My party proposes filling this gap with a debt responsibility mechanism, under which the Bank would be required to write twice a year to the FSA setting out the Bank's views and the FSA would respond. Both letters would be published. This is loosely based on the letter-writing connected to monetary policy, but it is not the same. I have adapted our concept for the Bill so that the Financial Stability Committee has to write to the FSA each year. The FSA then has to take it into account in determining the adequacy of resources for the threshold conditions.
	The Minister will be aware that both the Governor of the Bank of England and the deputy governor have called for new instruments to deal with the growth of debt. In a recent speech, the governor said:
	"What is required is an additional policy instrument to stabilise the growth of the financial sector balance sheet".
	Sir John Gieve told the BBC in December:
	"We need to develop something which ... prevents the financial cycle getting out of hand".
	I had hoped that my new clause would be headed "Debt responsibility mechanism" but, while parliamentary counsel has, as we discussed earlier, been allowed to spin so that his headings do not line up with the text, I was not allowed to give my new clause such a memorable title. However, while my new clause is rather more soberly entitled, "Debt: assessment of adequacy of resources", it is about a debt responsibility mechanism. I hope that the Government will find this a helpful addition to the Bill, since it fills a real gap in the current arrangements. I beg to move.

Lord Myners: This proposed new clause would place obligations on the FSA to have regard to the views of the Bank of England when taking decisions about whether individual firms have met threshold conditions. I emphasise that the Government entirely support the principle that the Bank of England's experience and expertise should be made available regularly, nay continuously, to the FSA and, indeed, to the Treasury. Yet I am far from convinced that the proposed clause is an effective or appropriate mechanism for achieving that.
	I entirely agree with the noble Baroness, Lady Noakes, that full and effective co-operation with the tripartite authorities is both desirable and necessary, but I would go further. I assure noble Lords that an effective, co-operative and collaborative working relationship is already in place, with the authorities working closely together in taking steps to secure financial stability. In working with other authorities, the FSA of course pays due attention to their views with regard to the financial stability of the United Kingdom. A clear process of consultation and information-sharing is in place, with regular meetings of the tripartite standing committee at principal and deputy level, allowing for a full exchange of views on any outstanding issues of concern, which any member of the tripartite authority wishes to raise.
	The Bill builds on this co-operative model, providing for improved co-operation and information-sharing across the tripartite in the interests of financial stability. Ultimately, it is for the FSA, independent of Government or the Bank of England, to determine how to exercise its powers with regard to the oversight of individual firms. The proposed new clause would risk undermining this principle. It is not clear from the new clause what mechanism there would be for linking the Bank's macro-level assessment of financial stability with the firm level or micro-assessments made by the FSA with respect to the continued compliance with regulatory threshold conditions.
	I am sure that noble Lords will agree that in planning for the future all firms need a degree of certainty as to the resources they need to hold in order to comply with their threshold conditions. The amendment would remove this certainty. The FSA would be forced under the provision to take the Bank's assessment of financial stability into account while deciding whether firms hold adequate resources. Therefore, the firm in question would have no way of knowing the amount of resources the FSA would judge to be adequate or whether this could change at any time.
	Furthermore, the amendment proposes that the consultation exercise should be conducted by public correspondence. As we have discussed in relation to the publication of the minutes of the FSC, the consideration of what information may or may not be made available to the public at any particular time is extremely sensitive, particularly as regards firm-specific information.
	The Bank of England already produces a financial stability report twice a year, which is publicly available. It is not clear what type of information would be included in the proposed letter from the Bank to the FSA that is not already published in the financial stability report, with the exception of that which is firm-specific.
	I have serious concerns that any response from the FSA would be likely to contain highly market-sensitive, firm-specific information and consequently should not be made public. I hope that this explanation of the Government's position about this amendment has been helpful, and that the noble Baroness will be charitable enough to withdraw the amendment.

Baroness Noakes: The Minister really should not ask me to be charitable. It is not something that comes naturally working in Committee, especially approaching midnight; so charity will not form any part of my decision-making process in relation to the amendment.
	The Minister explained how the tripartite arrangements are already working effectively, and so on. Such arrangements have been in place since 2000 at least. Had we asked the question at any point along that time continuum, I suspect we would have been told that the tripartite arrangements were working effectively, with meetings at the various levels that the Minister described.
	Of course there was a disconnect between the Bank's analysis of what was happening to debt in the economy and what the FSA was doing. There is no question of that. If you look very carefully at the financial stability reports you can find some of that analysis. The financial stability report is put together in a rather academic way. It is not a communication from the Bank saying it believes that leverage ratios and personal debt are too high, or whatever.
	That is the genesis of needing an additional process and needing it to be public so that the Bank's views can be put on the record. I agree with the Minister that no part of the correspondence should be firm-specific. That was not the intention of our proposals, which are to deal with issues of macro-analysis and what the FSA's generic response to that macro-analysis would be.
	The Minister asks me to withdraw the amendment. As far as I can see, the Government have no proposals to meet this policy-instrument gap that both the governor and the deputy governor have highlighted. We are offering something which we believe would fill that gap and in effect turn the clock back to remedy something that got lost when the FSA took over banking supervision. I will think further about what to do with this before Report. I beg leave to withdraw the amendment.
	Amendment 198 withdrawn.
	Amendment 198A
	 Moved by Lord Saatchi
	198A: After Clause 228, insert the following new Clause—
	"Objectives in relation to monetary policy
	(1) The Bank of England Act 1998 (c. 11) is amended as follows.
	(2) In section 11(b) omit the words "subject to that,"."

Lord Saatchi: These days parliamentarians receive very little praise. What we usually get is offhand criticism by people who question our motives or our behaviour, so I pay tribute to this Committee. Although I have not attended much of the Committee stage until today, the Hansard reports of the well mannered and illuminating debates on this Bill bear witness to anyone who cares to read them that this House is overwhelmingly occupied by thoughtful and responsible people, honestly striving by their own best lights to pursue the ideals for which the place stands. I hope to live up to the standards of the Committee with my three amendments today. They are all related and they all have the same purpose. For your Lordships' easy reference I can provide a simple précis: never again.
	Were there to be a fire in Britain with many hurt and much property damaged, you would expect the Government of the day to bring forward a Bill. Let us call it the "Fires Bill". Were that Bill to bear any resemblance to this Banking Bill, it would deal in an excellent and worthy way with the speed of the fire engine on the way to the scene; who was in the driving seat; what type of hoses the fire engine carried; who was in the control room; and where the control room was situated. All very worthy and important, but in fact people would want to know what the Bill did to prevent the outbreak of such a disastrous fire again. This Bill, worthy though it is—which is why my noble friend has supported so much of it in principle—does not do that. That is why I have tabled Amendments 198A, 198B and 203A.
	Amendment 198A deals with the error in the remit of the Bank of England of obliging the Bank to focus only on inflation. Amendment 198B addresses how that error was compounded by obliging the Bank to focus only on one kind of inflation—the wrong kind. Later we will come to Amendment 203A, which places a duty on auditors to investigate and report on banks' exposure to liabilities held off balance sheet. These amendments will not abolish the economic cycle but taken together, if they were on the statute book, we would never again have an economic crisis caused by a banking crisis caused by debts that went unseen by auditors, regulators and central banks.
	I stress to the Committee that I am not interested in apportioning blame for this crisis. Should there be the failure of free markets or failure of regulation, I really do not mind; or the failure of the FSA, failure of the Bank of England, failure of the Treasury or failure of the whole tripartite system, again, I do not mind; or the failure of the UK, or of the US or of the entire world, again, I do not mind. I have one, and only one, modest aim, which is to persuade the Minister and Her Majesty's Government to accept the advice of your Lordships' House to make sure of one thing: never again.
	I bring Members of the Committee to my first amendment, about the remit of the Bank of England. Shakespeare taught us that human beings can have a fatal flaw. So, too, can legislation. The Bank of England Act 1998 has a fatal flaw. It has three words too many, which this amendment would delete. The amendment is based on the unremarkable proposition that officials of the Bank of England have sufficient wisdom and breadth of vision to see the whole economic picture. They should not be forced to wear legislative blinkers which blind them to how an economic disaster can arise during a period of low inflation.
	In making these remarks tonight, I want to be clear that I am an enthusiastic supporter of the current team at the Bank of England. However, the record seems to show that the top officials of the Bank of England were like top generals given the wrong orders. The fault lies not with them but with the legislation that created them, hence the amendment.
	As Members of the Committee are well aware, Section 11 in Part 2 of the iconic Bank of England Act that gave the Bank its independence, of which the Government are proud, mistakenly defined the role of the Bank so that when this crunch came its top officials were looking the other way. It reads:
	"In relation to monetary policy, the objectives of the Bank of England shall be—
	(a) to maintain price stability, and(b) subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment".
	So the Bank of England was to concentrate only on the rate of inflation to the exclusion of all else. During the passage of the Bank of England Bill through your Lordships' House, there was much discussion of those three words, "subject to that". Why not "having regard to", or "taking account of"? Why were all other considerations to be subordinate to controlling inflation?
	We talked about this at Second Reading, and I will not—certainly not at this hour—go into the economic orthodoxies of the time, what Professors Paish and Phillips did at the LSE or the wage/price spiral; we all know about this. I remind the Committee that the winning argument when the Bill was enacted was undoubtedly that the relegation of the Government's "growth and employment objectives", in the words of Section 11 of the Act, would prevent the manipulation of economic activity by unscrupulous politicians in search of votes; and that control of inflation was in any case the best guarantor of growth and employment.
	On 12 November, in reply to a Question about that remit by the noble Lord, Lord Barnett, itself in response to a Bill that I had introduced about the remit, the Minister was still clinging to the wreckage of that ancient theory. The Minister said that the Government were quite satisfied with the present remit of the Bank of England. It was impeccable. In fact, it was so perfect that it had been responsible for the fine performance of the economy under his Government. He said flat out that the remit,
	"should not in any way be amended".—[Official Report, 12/11/08; col. 655.]
	He gave his reasons. The remit had delivered,
	"unparalleled ... economic growth and low inflation".—[Official Report, 12/11/08; col. 654.]
	He explained how it had achieved this. He said that stable prices and economic growth are,
	"not in conflict; one is a precondition of the other".—[Official Report, 12/11/08; col. 655.]
	He went on to say that low inflation was "an essential precondition" of growth and prosperity.
	In other words, on 12 November the Government thought that with low inflation all good things would follow: economic growth, prosperity and financial stability. Unfortunately, we all know it has not worked out quite like that. The extraordinary thing is that by 4 December, when this Bill was introduced into your Lordships' House, the Government—through the medium of the Minister—had changed their mind. They had found a flaw in the remit of the Bank of England. Clause 228 would amend it. Is it not extraordinary that on 12 November low inflation was the guarantor of financial stability and on 4 December it was not?
	I welcome a sincere convert to my cause. Having seen the rightness of the case for amendment of the remit, the Minister has introduced this new Section 2A(1) into the Bank of England Act. As we have heard this gives the bank a new objective—the noble Lord, Lord Davies, said it now has a dual objective. This is,
	"to contribute to protecting and enhancing the stability of the financial systems of the United Kingdom".
	What might have led the Government to change their mind about the need for an amendment to the remit of the Bank of England? We now know to all our cost—belatedly the Minister agrees—that low inflation may be a necessary condition to economic growth but it is not a sufficient condition for it. It is certainly not a sufficient condition for financial stability. That final theory to which the Minister was still clinging on 12 November had already met its Waterloo in October 2008 when we discovered, according to the deputy governor of the Bank of England, that,
	"the largest financial crisis in human history",
	could arise in a period of low inflation. By focusing only on inflation, as Section 11 of the Bank of England Act directed it to, the Bank was blindfolded to the disaster for economic growth and financial stability that could occur in a low-inflation environment. I say never again.
	All of us know the importance of language. Parliamentarians are often mocked for endlessly debating tiny amendments to legislation such as "delete 'a', insert 'the'". In this case three words really have changed history. It is time to delete them from the statute book. This amendment will do that. I beg to move.

Lord Newby: One of the first things I learnt about being active in politics was always to stay to the end of the meeting. The noble Lord, Lord Saatchi, has followed that injunction, sitting quietly listening to our deliberations for eight hours. I am pleased to welcome him back to our debates on economic policy and to those heady days when we were discussing the then Bank of England Bill.
	I am afraid I never altogether agreed with him then and I do not now on this subject. The problem of the Bank of England or the Monetary Policy Committee is when you give it one shot but two targets. The great advantage of the remit at the moment is that it has one shot in its locker, which is the interest rate, and one target, which is the inflation rate. That makes it much easier for it to do the job.
	As it happens, most of the criticism of the MPC for most of its period is that it kept interest rates too high, that it could have reduced interest rates further to promote growth and employment, and that, far from it being a profligate institution about interest and inflation rates, it erred on the side of caution. Also, from the beginning of last year David Blanchflower, a member of the MPC, argued that, given what was coming down the track in inflation as much as anything else, the Bank should have been cutting interest rates. Even within the existing remit of the MPC it would have been completely possible for it to cut interest rates quicker than it did.
	We objected that it seemed to be slow in reducing rates dramatically in the autumn, but at that point our solution was for the Treasury to invoke the provision in the Bank of England Act that would allow it in exceptional circumstances, which these undoubtedly were, to override the basic interest rate target and to set different objectives for the MPC. We thought that the Government could and should have acted in that regard. As it happened, it would have made very little difference because the Bank acted of its own volition probably within about a fortnight of our feeling that it should have moved more quickly.
	I am sorry not to be able to support the amendment. I do not know whether the noble Lord intends to speak separately and in detail to Amendment 198B. If he does, I shall respond to it then.

Lord Myners: As we heard, Amendment 198A would change the objective of the Bank of England in relation to monetary policy. I welcome the noble Lord's considered, measured and sincere expression of views on a matter on which I know he has been much exercised for some considerable time.
	As noble Lords will no doubt be aware, and as the noble Lord, Lord Saatchi, has already explained, Section 11 of the Bank of England Act 1998 states that the Bank's objectives for monetary policy are maintaining price stability and, "subject to that"—the offensive words—supporting the economic policy of Her Majesty's Government, including its objectives for growth and employment. The amendment would make these two objectives equal in weight.
	As the Government reaffirmed in the 2008 Pre-Budget Report, the existing monetary policy framework remains the right approach for these challenging economic circumstances. Its design gives the independent MPC the means to deliver price stability while avoiding unnecessary volatility in output. I do not agree that it would be beneficial to the UK's economic policy over the medium term to amend the objectives of monetary policy and, in effect, to give the Monetary Policy Committee a dual mandate. As the noble Lord, Lord Newby, suggested, there would be one instrument and two targets. First, price stability is the MPC's primary objective, with good reason. Price stability is a pre-condition for growth and full employment, so it must be achieved first and foremost if economic stability is to be secured.
	Secondly, the amendment is unnecessary as the remit for the MPC already provides for the committee to respond flexibly in difficult economic circumstances. The 1998 Act states that the Treasury shall, by notice to be provided in writing to the Bank at least once in every 12-month period,
	"specify for the purposes of section 11 what price stability is to be taken to consist of, or ... what the economic policy of Her Majesty's Government is to be taken to be".
	The Chancellor last wrote to the governor stating the purposes of Section 11 at the 2008 Budget. The remit letter stated:
	"The framework takes into account that any economy at some point can suffer from external events or temporary difficulties, often beyond its control. The framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the ... target in these circumstances may cause undesirable volatility in output".
	I also refer the noble Lord to the minutes of MPC meetings, which show the importance of GDP growth influencing inflation as a factor underpinning the committee's interest rate decisions. I think that noble Lords will find that that is a consistent element in the MPC's minutes.
	Thirdly, giving the MPC a dual mandate, with equal priority for both price stability and economic growth objectives, would risk markets and the public doubting that the MPC would act resolutely on inflation if there could be negative short-term consequences for growth, which could destabilise inflation expectations. This was clearly at the heart of the discussion in this House when the Bill was first debated. Inflation is pernicious; it steals from the weak and at times gives to the reckless. It is not something on which the Government would want to take a risk. We believe that commitment to a low and stable rate of inflation, as delivered by the MPC with much credit to the Bank of England and the members of the committee over the past 10 years, has played an important part in a period of exceptional, consistent economic growth. That period of growth has come to an end as a consequence of global factors. We found ourselves in a recession alongside most of the world's major developing countries. It is difficult to believe that that can be laid entirely at the door of the MPC, let alone three words in the Act.
	Accordingly, I respectfully suggest to the noble Lord that he considers withdrawing his amendment, but before doing so, he might wish to speak to Amendment 198B.

Lord Saatchi: I should have done that and I apologise. We can talk about what to do with both amendments at the end.
	I hope that I explained in Amendment 198A the error in the Bank of England's remittal, or my version of it, of obliging the Bank to focus only on inflation. Amendment 198B deals with how that error was compounded by obliging the Bank to focus on only one kind of inflation—the wrong kind, as it happens. Whereas the Bank's consumer price index keeps a close eye on inflation on the price of a packet of peas and a loaf of bread, it overlooks the very aspects of inflation that caused this crisis—all the debt, housing and mortgage ingredients of our present misfortune.
	For the past five years debt inflation was 9.5 per cent a year, which is four times the Bank of England's CPI inflation target. Where is debt inflation in the CPI? It is not included. During the same period the inflation rate of one particular asset class—property—was 13 per cent per annum, which is five times the Bank of England's CPI target. Where is that in the CPI? It is not included. What about the cost of acquiring and holding these property assets—mortgage interest? That is not included in the CPI.
	I understand the difficulty in suggesting a definitional change for inflation. The current CPI is bound by international standards and enforced by EC regulation. It was apparently intended to measure the changing price of consumer goods and services and not the change in the value of assets or debt servicing costs. That was a mistake on the part of those who devised the measure. Eurostat, which is the responsible body, has now conceded that it was an error and has apparently been considering for some time the inclusion in the CPI of service costs for acquiring new owner-occupied housing. Sadly, that investigation by Eurostat has not yet concluded an appropriate practice.
	It should get on with it. The Bank's CPI measure of inflation is out of touch because the world has changed. The era of controlling inflation and inflation expectations with hand signals from Threadneedle Street to deter troublesome union wage demands is over. Millions of people had become investors in a new asset class. They were homeowners. We are used to lamenting the disappearance of private investors from the stock markets, but they did not stop investing; they just found something better to invest in—property. They adopted a simple model: I borrow money; I buy an asset; the price goes up; I exit the asset; I repay the loan; I keep the profit. That was the joy of debt, as taught by the masters of private equity. Why should private individuals not do the same? They did in their millions. By creating the false impression—that is my opinion, although it is denied by the Minister—that low inflation meant financial stability, and then measuring the wrong kind of inflation, the Act encouraged the view that it was safe to borrow and invest. British households took the message and took on twice as much debt as their EU counterparts. UK average household debt more than doubled from £23,231 in 1996 to £56,501 10 years later—that is staggering—yet the rate of inflation, so called, as monitored by the Bank of England, excluded debt inflation, asset class inflation and mortgage interest inflation, the very causes of the current crisis. Nor did Clause 11 in the original Act consider how a change in the inflation rate of a certain asset class could bring about a dramatic collapse in the economy, notwithstanding low inflation as defined by the Bank and the Act.
	As the current chairman of the Federal Reserve, Ben Bernanke, put it recently, there is no one correct method for valuing an asset class, and the Minister is extremely well aware of that. There are two methods. The first is the price a normal seller would receive from a normal buyer who considers the value of the asset at maturity. The second is the price a distressed seller would take now from a reluctant buyer. That change in valuation methodology, which is completely unforeseen in the Bank's definition of inflation, created this crisis. By focusing on the wrong kind of inflation, as the Act directed it to do, the Bank of England was blindfolded to the disaster that could occur in a low-inflation environment. This amendment takes off the blindfold. I beg to move.

Lord Newby: I have rather more sympathy for this amendment than for the noble Lord's previous one. It has been obvious for a long time that the asset price bubble in housing was a major feature of the way in which households were viewing their purchasing and prices more generally. For a long time, the governor of the Bank—this is nothing to do with Europe—resolutely denied that the measure of inflation should take any account of asset prices. He has been before the Economic Affairs Select Committee of your Lordships' House many times and made that point very eloquently. He was totally deaf on the point. It is now obvious that the spectacular rise in house prices was unsustainable and that it had a knock-on effect on inflation more generally because people were borrowing against it. There is now a recognition, even in the Bank, that something needs to be done.
	The noble Lord, Lord Saatchi, said that they should get on with it. The good thing from his point of view is that they can now get on with this almost at leisure because inflation and interest rates are virtually zero, and this will not become a problem until the next irrational upswing. We probably have several years in which we can try to get a better way of valuing asset prices in terms of the inflation index before it will have any practical impact. I agree with the noble Lord there is now a recognition by the governor and the banking authorities across Europe that something needs to be done. There is a window of opportunity during which there will be virtually no cost in doing nothing immediately, and during which I hope something will be done.

Lord Myners: At present the definition of price stability is specified in writing to the Bank of England at least every 12 months and is not specified or restricted in any way in the Bank of England Act 1998. The Chancellor last wrote to the Governor of the Bank of England on 11 March 2008 to specify the inflation target as 2 per cent as measured by the 12-month increase in the consumer price index. It would be inappropriate for this mechanism to be constricted by the Act in the manner suggested. It is important that monetary policy decisions are based on the most relevant and accurate measure of inflation. To meet this objective there has been only one change in the inflation target since the inception of the MPC, in 2003.
	The proposed amendment would remove the existing flexibility, which could be to the detriment of the monetary policy framework. The inclusion of the cost of property assets is one of the most challenging areas in constructing a consumer price index and has been debated at great length by economists and statisticians around the world. Its inclusion is even more challenging in the UK, where the current target measure of inflation, the consumer price index, is harmonised across more than 30 European countries, as the noble Lord, Lord Saatchi, acknowledged.
	The independent Office for National Statistics and national statistical offices of other European member states are working with Eurostat, the statistical office of the European Community, to assess the most appropriate approach to including in future an index of owner-occupied housing costs in the CPI. However, at present there remains no international consensus on how to include the cost of property assets in this calculation. The noble Lord, Lord Saatchi, said that they should get on with it. I thoroughly agree, as did the Chancellor of the Exchequer in his recent Mais Lecture. While there exists no suitable measure of inflation that includes the cost of property assets, the noble Lord's amendment would not only remove the flexibility which benefits the current monetary policy framework; it would damage the framework by forcing the adoption of an unsuitable inflation measure.
	I thank the noble Lord, Lord Newby, for reminding us that in the world of central banking there has been considerable scepticism about whether it is possible to control both consumer price inflation and asset inflation through interest rates. Mr Alan Greenspan was clearly of the view that it could not be done and suggested that the best that the Federal Reserve bank could do would be to clear up the mess after asset bubbles had burst. He has now reflected on whether that was the right conclusion and has reconciled his earlier observations with reality by suggesting that he made assumptions about the behaviour of employees and boards of directors in banking organisations that proved to be too theoretical and lacking in a full awareness of human behaviour. The Governor of the Bank of England, Mr Mervyn King, expressed similar doubts in the past about the wisdom of the Bank of England seeking to control market valuations. However, there has been a change of view in the central banking community throughout the world.
	It is possible that the time will come for the amendment of the noble Lord, Lord Saatchi. He may require a more complex series of proposals to achieve his goal. However, it is entirely laudable to aspire to his objective of "never again". We should draw inspiration from that goal. However, at this stage his amendment is premature. The next trigger point may be a report from Eurostat and other statistical bodies, including our own national statistical office, on mechanisms by which owner-occupied housing could be incorporated into an inflation index. If a consensus emerged around that, the Chancellor of the Exchequer would be bound to take it into consideration in determining how to phrase the inflation objective. But until that work is complete—I repeat that I share with the noble Lord, Lord Saatchi, a wish to see them press on and bring this work to a conclusion—it would be too soon to go as far as his amendment suggests. Therefore, I would respectfully ask him to withdraw his amendment.

Lord Saatchi: I thank the Minister for his generous remarks. The noble Lord, Lord Newby, made a brilliantly shrewd but simple point about the question of the definition of inflation; namely, that there is some time for Eurostat and the other bodies perhaps to form the consensus described. It is most unlikely that we will have another asset bubble any time soon.
	On Amendment 198A and the remit, in November, when I put it to the Minister that this remit wanted changing for all the reasons we have discussed, he firmly said, "Not at all: the remit is excellent". Therefore, being a modest soul, my hand literally trembled over what I think Trotsky called "the rubbish heap of history". I was about to drop my Bill into the rubbish heap of history on the basis that the Minister knew what he was doing, as did all the luminaries in the Government, and that I was perhaps wrong about this remit for the reasons which the noble Lord, Lord Newby, outlined; namely that it is better for a person to have one target than two, because they can get confused and conflicted and so on.
	I felt that until this Banking Bill dropped through my letterbox. Then I saw that the luminaries had decided that the existing remit was incorrect and that something else needed to be added, which the Government have added in the form of Clause 228 on financial stability. I was going to drop my Bill and this point because of the merit of one remit rather than two, which the Government have abandoned under Clause 228. Five minutes ago, the noble Lord, Lord Davies, praised the merit of the "dual remit". What was once the benefit of a single remit—which, as the noble Lord, Lord Newby, said, is concentration on one target—has been dropped by the Government in favour of the merit of what the noble Lord, Lord Davies, a few minutes ago called the dual remit.
	If there is to be a dual remit, I would very much like my version of the second remit to be considered. I hope that the Minister will think about the merit of such a remit. It is not so remarkable. The Federal Reserve Act 1913 gave the Fed a dual mandate. It is apparently not the end of the world. The American economy has not done too badly since 1913. I hope that the Minister will reflect on it, and I thank him for his generous response. I beg leave to withdraw the amendment.
	Amendment 198A withdrawn.
	Amendment 198B not moved.
	Clauses 229 to 232 agreed.
	Clause 233: Tenure
	Amendment 199
	 Moved by Baroness Noakes
	199: Clause 233, page 114, line 9, at end insert—
	"( ) In paragraph 1(1) of Schedule 1 to the Bank of England Act 1998 (term of appointment) for "5 years" substitute "8 years and 5 years respectively".

Baroness Noakes: We return to more mundane matters with Amendment 199. I shall speak also to Amendment 200. Clause 233 makes some changes to the tenure arrangements in the Bank of England Act 1998. On the whole we welcome them, together with the somewhat belated conversion to open and transparent appointment processes. However, one important issue remains, which is not addressed by the changes in this Bill. We believe that the governor should be appointed for one non-renewable term. The Government propose two terms of five years. Our amendments propose one term of eight years.
	There have been two very public reappointments to the office of the Governor of the Bank of England since the Government have been in power, each of which has left a sour taste. In each case there was a degree of briefing, presumably from the Treasury or No. 10, about the likelihood of the reappointment of the incumbents—the noble Lord, Lord George, as he now is, and Mr King. In each case the governor won his re-appointment but not without some loss of dignity to the office of governor. We do not want to see that happen again, and we do not believe that the process of advertising for a reappointment will avoid the problems happening again. The decision will still be made ultimately by the Chancellor and the Prime Minister, whatever processes precede it, and the problems that we have seen will therefore not be avoided.
	In another place, the Minister's rationale for opposing our idea of one term of eight years included the extraordinary suggestion that it would deter high-quality candidates. That is just nonsense: there would never be a shortage of candidates for the governorship of the Bank of England. Political interference is a much greater deterrent than length of term and it is that which our amendment seeks to address. I beg to move.

Lord Myners: As the noble Baroness has explained, her Amendments 199 and 200 would change the duration of the governor's appointment from five years, as it is at present in Schedule 1 to the Bank of England Act 1998, to eight years. They would also limit the governor to serving only one term of office rather than a maximum of two, as provided for in Clause 233 of the Bill.
	The amendments would change the tenure of the governor. The current five-year term for the governor and deputy governor, as it was at that time, was set at the time of nationalisation in 1946 and has proved itself perfectly effective ever since. If the amendments stem from a concern that the governor is subject to additional influence or pressure as a result of the possibility of reappointment, I shall try to offer some comfort.
	As noble Lords are likely to be aware, governor and deputy governor appointments are made by the Crown on the advice of the Prime Minister and the Chancellor. The term in office is fixed in legislation, and Clause 233 would limit the appointments to a maximum of two terms. Such a restriction is quite common in the realm of public sector governance. The powers to remove a governor or deputy governor from office are captured in the Bank of England Act 1998, and, while such a removal requires the consent of the Chancellor, the reasons for doing so are limited and are effectively for the Bank to determine.
	Again as detailed in the Bank of England Act 1998, the remuneration and pension arrangements of the governor and deputy governors are set by the Bank, free of ministerial involvement. In future, vacancies for governor and deputy governor are to be advertised and to be conducted in a manner consistent with the principles of open competition, which were put in place for the recent recruitment of the deputy governor for financial stability. All of the elements relating to selection, duration of term, removal from office and level of remuneration are already subject to, at most, limited ministerial involvement.
	Having a maximum of two five-year terms in office offers a strong balance between certainty and continuity on the one hand and flexibility on the other. A five-year term for the governor with the possibility of a second term gives the individual a natural break point at which to consider whether they wish to continue in the role. It also gives them something to work towards and provides an opportunity to consider their performance. In contrast, a single eight-year term might discourage some strong candidates from applying, as they might not feel that they can make such a long-term commitment.
	I hear what the noble Baroness says in that respect, and she is absolutely right that the governorship of the Bank of England is a coveted position that carries great respect and esteem. But in an environment in which people increasingly seek flexibility in their life and the capacity to move between sectors—to move out of academia, perhaps, into the private sector and then back into academia or a banking institution—we should not lightly dismiss the idea that an eight-year term might be a deterrent, particularly if one is considering an applicant from outside the bank who, regardless of how well he or she conducts their research, may not be able to achieve absolute clarity as to whether it is a role they are truly going to be able to do well. As such, a five-year appointment with an opportunity to exit at that stage may well persuade a candidate to step forward, which they may not wish to do if they have to commit to a period of eight years.
	I agree that it is a matter of judgment. It is six of one and half a dozen of the other. I simply would not lightly reject the idea that a longer period of appointment might be a deterrent. To stretch it to absurdity, it if were a 15-year appointment, one would imagine that candidates of extraordinarily high quality simply would not accept. Where is the tipping point? Is it at five years or eight years? That must be a matter of judgment and experience. For that reason, I disagree with the amendments tabled by the noble Baroness, and I ask her to withdraw this one.

Lord Oakeshott of Seagrove Bay: I wished to hear what the Minister and the noble Baroness, Lady Noakes, said on this amendment. As the Minister rightly points out, it is a matter of judgment. Having heard both arguments, we on these Benches feel that five years renewable is more sensible than the "big bang" decision of giving someone the job for eight years, when one may well regret it very shortly afterwards. Five years renewable is the choice given to the electorate. In America, presidents may be given eight years, but there is a review after four years, if I can put it that way. The case made by the Minister, I think, is right. Five years with one further term is the appropriate way to proceed.

Lord Myners: I am grateful to the noble Lord, Lord Oakeshott of Seagrove Bay, for his observations and comment. I repeat that this arrangement has been in place since the immediate post-war period. We have had an extraordinarily good succession of very high-quality governors. If it isn't broken, we should not seek to mend it. The existing arrangement has worked well and is working well, and there is no reason why it should not continue to work well.

Baroness Noakes: I thank the Minister for his considered response. The Minister says that the system works well, so we should let it carry on working well. My point was that it had stopped working well because of the highly publicised nature of the reappointment process for both of the recent incumbents. I am sure that the Minister will recall the most recent one, although he may not recall the previous one, which was when I was a member of the court of the Bank of England. It was a distressing time, and it was not easy for the office of governor, which is a highly revered office in the UK and internationally, to continue to hold its head high in that period when there was much counter-briefing.
	I understand what the Minister has said and, in ordinary terms, five years renewable is a perfectly sensible arrangement. My party's point is made in the particular context of the office of governor of the Bank of England. That appointment would be taken completely out of politics if there were no possibility of interference. We shall not agree on this, and perhaps this policy will have to await another general election. I beg leave to withdraw the amendment.
	Amendment 199 withdrawn.
	Amendment 200 not moved.
	Clause 233 agreed.
	Clause 234 agreed.
	Clause 235 : Weekly return
	Debate on whether Clause 235 should stand part of the Bill.

Baroness Noakes: I have given notice that we wish to oppose Clause 235 standing part of the Bill. This clause removes one of the few regular sources of information about what is going on in the Bank and replaces it with absolutely nothing.
	Since the Bank Charter Act 1844, the Bank has been required to produce a weekly return, which is in the form of a weekly balance sheet. The underlying rationale for removing this requirement is, I understand, to allow the Bank to conceal covert support operations on the basis that public knowledge might increase the likelihood of financial instability, either generally or in a specific case about the bank or banks being supported. On the other side of the coin, financial markets need information about the financial system if those markets are to work efficiently. Why does the possibility, which is probably remote, of a covert bank operation supplant the ongoing need for market transparency?
	In addition, we are aware that the Government are actively considering having the Bank print more money in the face of the recession and the possibility of deflation. Do we really want the Bank to move towards giving even less information about what it does at such a critical time for the economy? This is exactly the time when we need more information, not less. Of course, we support the general aim of not disrupting financial stability, but we are far from convinced that the gains from this clause outweigh its disadvantages. We also disagree with the all-or-nothing approach taken by the Government.
	Until the mid-1990s, the Bank took advantage of the so-called banking exemption from its accounts showing a true and fair view, and it held inner reserves, a practice which the banking community had generally abandoned somewhat earlier. The rationale for keeping the exemption was to conceal a covert support operation. The world did not come to an end when the Bank stopped having inner reserves and stopped having the ability so easily to conceal a support operation.
	I wonder whether it is right that we should move from having regular information about the Bank's financial position and the other matters that are covered in the weekly report to having absolutely no information. The Minister might like to reflect on whether there is a middle way so that, instead of having a weekly report, there could be a requirement for a monthly report or a weekly report delayed for a period. In another place the Minister suggested that this was a matter for the Bank, but we reject that proposition. It is not customary to let bodies judge for themselves what is right in the name of transparency and public accountability. That is a decision that Parliament, and not the Bank, should take. I look forward to hearing whether the Government are really satisfied with completely removing this reporting requirement and replacing it with nothing.

Lord Myners: Clause 235 removes the legal requirement that the Bank of England must produce weekly returns of accounts from its issuing and banking departments. This requirement was established in the Bank Charter Act 1844. The weekly return consists of a one-page summary, produced by each department, indicating the sum of assets and liabilities for that department for the week in question. As the noble Lord, Lord Saatchi, was kind enough to remind the House earlier, my previous career was as an investment analyst. I and just about most other people in that trade—and it is a trade, not a profession—were oblivious to this weekly report. Very little analytical work and very few conclusions were based on this report because of its limitations, referring, as it does, to the weekly returns from two departments of the Bank, rather than from the Bank as a whole. After the provision is revoked, the Bank of England will still be able to publish such or similar accounts if it so wishes, but it will not be compelled to do so.
	I am grateful to the noble Baroness for calling this debate. I hope to address what I believe respectfully to have been certain misconceptions as to its effect.
	Clause 235 is designed to prevent the Bank having to make what may be inappropriate disclosures under certain market conditions; for example, disclosures connected with any liquidity assistance that it might provide to the market or to a particular institution.
	The experience with regard to Northern Rock, when such a report first received significant attention from the analytical community, has shown the risks associated with the market becoming aware of the provision of liquidity assistance to an individual firm before there has been time for that assistance to be effective in helping the firm resolve its difficulties. In that case, analysts studied the weekly return of the Bank of England in an attempt to determine the amount of liquidity support drawn down. This contributed to the critical problems with market confidence that we saw over Northern Rock, as the Bank of England explained.
	If the Bank of England had not been legally required to produce a weekly return over this period, it is conceivable that some of these difficulties may have been avoided. It is for this reason that the Government intend to remove the legal requirement to publish on a weekly basis, allowing the Bank of England to judge what form of reporting is appropriate in given circumstances.
	The Government have a strong commitment to transparency and believe that the free and effective flow of information is vital both to a functioning market and to the trust placed in public institutions. However, in periods of high market stress, such as we have experienced recently, there may be circumstances where immediate disclosure of liquidity support is in no one's interest. Some honourable Members in the other place rightly noted that it would be difficult to delay disclosure of major liquidity support operations for any significant time. I agree. It would not be practicable, and the Government do not intend for there to be delay in the disclosure of liquidity assistance for anything beyond the short term. However, in dealing with the sensitive issue of market sentiment, days and even hours matter, and the ability of the authorities to exercise a degree of choice over how information is disclosed is important.
	Clause 235 therefore addresses the issue by removing the legal requirement to report. It operates in conjunction with Clause 242—"Registration of charges"—and Clause 243—"Registration of Charges: Scotland"—in removing provisions that may require premature disclosure of liquidity assistance by the Bank of England. These are appropriate and proportionate measures, the need for which has been proven by events. The drafters of the Bank Charter Act 1844 would not have anticipated the impact that enforced disclosure could have in modern markets, and it is the Government's view that the provision needs to be changed. I hope that I have given noble Lords a clear indication of why the Government are pursuing this clause.
	Concern has been expressed with regard to the transparency of the Bank of England. As I mentioned, the Government have no intention of reducing the overall level of transparency of the Bank's activities. It is my firm belief that there will be no substantial overall impact on the Bank's transparency as a result of the clause.
	In practice, the publication of the weekly return has ceased to be needed as a record of the Bank's activities, since other instruments, including an annual statement of accounts, have superseded it. The Bank of England also remains subject to normal Office for National Statistics and Companies Act reporting requirements. Further, it is worth noting that the requirement for the Bank to publish a weekly return is not one to which the market has expressed any major attachment.
	The Bank of England is at present unusual among central banks in being required to report on a weekly basis. None the less, it is cognisant of the need for transparency in its activities. I can inform the House that the Bank intends to consult with interested parties on appropriate disclosure in the future. It already publishes extensive information under its commitment to international best practice in statistical reporting.
	I hope that I have reassured noble Lords on the intention behind this clause. It is an appropriate and proportionate step to enable the Bank of England to take proper control of its reporting processes and to avoid a serious failure of market confidence in periods when liquidity assistance has been offered. In reminding the Committee of the Bank of England's indication of its intention to consult on disclosure and transparency, I trust that for now noble Lords will withdraw their objections and let Clause 235 stand part of the Bill.

Baroness Noakes: The Minister's reply is helpful. I am not sure I understood which Companies Act reporting requirements apply to the Bank of England because it is not subject to the Companies Act. No doubt the Minister can clarify that in writing.
	I understand the Government's concern about not wishing to increase the possibility of financial instability; I conceded that earlier. The fact remains, however, that some information from which markets could find out whether the Bank was printing money, for example, will be removed. The Minister says that there is no intention to reduce transparency but that the Bank will publish if it so wishes. That does not seem like a recipe for transparency. I will, however, consider further before Report.
	Clause 235 agreed.
	Clauses 236 and 237 agreed.
	Amendment 201
	 Moved by Baroness Noakes
	201: Before Clause 238, insert the following new Clause—
	"Regulatory objectives
	For section 3(1) of the Financial Services and Markets Act 2000 (market confidence) substitute—
	"(1) The market confidence objective is: ensuring that the financial system operates in a way in which public confidence is justified and achieved.""

Baroness Noakes: This amends one of the FSA's regulatory objectives as set out in Section 3 of the Financial Services and Markets Act 2000. At present—we discussed this earlier today—the market-confidence objective is,
	"maintaining confidence in the financial system".
	That is all very well but it assumes that the system merits confidence and there is nothing in the FSA's objective which requires the FSA to ensure that the financial system is worthy of confidence. Only if that is achieved should the FSA seek to maintain confidence in the system. I am indebted to an Adam Smith Institute pamphlet on bank regulation for the inspiration behind this amendment. I hope the Minister can see that the reworded objective would at least more honestly deal with what the FSA should be trying to do. The current wording of the objective does not give a clear indication of what the FSA should be doing. I beg to move.

Lord Davies of Oldham: This amendment does not add a great deal to the Bill and I will ask the noble Baroness to withdraw it. I would, however, like to reassure her that what she is proposing is broadly in line with the clause as it stands. Section 3(1) of the Financial Services and Markets Act 2000 provides that the FSA's market-confidence objective shall be,
	"maintaining confidence in the financial system".
	The proposed amendment would substitute the existing drafting to require the FSA to undertake its statutory functions with the objective of,
	"ensuring that the financial system operated in a way in which public confidence is justified and achieved".
	The existing market-confidence objective is broadly drafted to encapsulate public confidence to include the confidence of individuals participating in the financial markets and exchanges but also those individuals who participate or benefit from the provision of regulated activity or other activities connected to the markets and exchanges. However, the FSA is also subject to public awareness and consumer protection objectives, including the objective of reducing financial crime. These objectives together are designed to contribute and enhance public confidence in the financial system. The FSA already has a strong focus on consumer and public confidence as part of its public awareness and consumer protection objectives, as well as its market confidence objective. So, taken on their own, the FSA is already under the obligations to which the noble Baroness's modest amendment would only add unnecessarily. Because the FSA's remit is quite clear in the legislation, the amendment can safely be withdrawn. I hope that the noble Baroness agrees with me.

Baroness Noakes: I do not agree with the Minister. I would not have tabled the amendment if I agreed with him. The Minister says that the FSMA is perfectly clear, but it is not. It just says,
	"maintaining confidence in the financial system".
	You have to go through quite a lot of contorted hoops to get to the position where the Government say, "Of course it covers all these things". The man in the street reading that would not understand it, and neither did the Adam Smith Institute, which is why it featured in one of its pamphlets.
	I shall consider what the Minister said on the subject. For the moment we must agree to differ and I beg leave to withdraw.
	Amendment 201 withdrawn.
	Clause 238 agreed.
	Clause 239: Functions
	Amendment 201A not moved.
	Clause 239 agreed.
	Amendment 202
	 Moved by Baroness Noakes
	202: After Clause 239, insert the following new Clause—
	"Credit rating agencies
	(1) Schedule 2 to the Financial Services and Markets Act 2000 is amended as follows.
	(2) After paragraph 9 insert—
	"Credit ratings
	9A Providing ratings or numerical scores which are intended to indicate an opinion of the likelihood that a borrower will be able to repay its debt or of the likelihood of repayment of a particular debt instrument.""

Baroness Noakes: I return to the theme of spotting what has emerged in the past 18 months of the banking crisis but is not dealt with in this Bill. There has been much criticism of the work of the credit-rating agencies, which were at the heart of the activity of packaging up loans or elements of loans and giving them credit ratings which, as it turned out, seemed out of line with the underlying reality. The credit-rating agencies came in for a lot of criticism for their involvement in the sub-prime debt crisis. Of course, the individual institutions that had their instruments rated did not escape blame, but the credit-rating agencies themselves attracted considerable blame. They also attracted blame from, for example, local authorities that had deposited money with Icelandic banks and felt let down by the ratings given.
	As I understand it, the Financial Stability Forum is working on this issue for the G7. The EU has already announced that it wants to use the Committee of European Securities Regulators, working through national regulators, to deal with credit-rating agencies—so it will probably happen anyway. My amendment would allow the Government to get ahead of the curve. We do not need to be told by Brussels or the G7 what to do; we have one of the biggest financial services centres in the world and we should be leading the way, not waiting to follow. My amendment adds credit-rating agencies to the activities covered by the FSA's definition of regulated activities, thus bringing it within regulation. I beg to move.

Lord Davies of Oldham: The Government are not opposed per se to the view that credit-rating agencies should be subject to additional oversight. We believe, however, that given the global nature of the credit-rating industry, regulating such agencies nationally would not be the most effective option.
	The Committee will be aware that the European Commission has published a proposed regulation on credit-rating agencies. The Government have been in discussion with the Commission during preparation of that proposal, and we have consistently supported the introduction of a strengthened oversight regime for those agencies—as agreed at the ECOFIN council on 8 July last year—and the principles that they should be subject to an EU registration system, subject to practical considerations being resolved, and that such a system should be proportionate, principle-based and risk-based.
	As the EC plans to adopt that regulation in the coming months, it would clearly be inappropriate for the UK to take forward national regulation of credit ratings. Even if that were not the case, I can reassure the noble Baroness that if the Government decided unilaterally to regulate credit-rating activity under the Financial Services and Markets Act, that Act as it stands may well be broad enough to permit it. Credit-rating is probably sufficiently close to the activities already listed in Schedule 2 to fall within the scope of what may be regulated under the FSMA. Therefore, changes in primary legislation are not necessary; the only amendment needed would be to that Act's regulated activities 2001 order.
	If that is insufficient comfort for the noble Baroness, I reiterate what has been said repeatedly from the Dispatch Box during this Committee on amendments that seek to change the Financial Services and Markets Act: it would not be appropriate to change the fundamental objectives of the FSA via this Bill, as its primary focus is banking. This is not the occasion for a fundamental rewrite of the legislative structure governing the FSA. On both those main grounds, I hope that the noble Baroness will appreciate that the Government's position is sound, and that the amendment should be withdrawn.

Baroness Noakes: I thank the Minister for that comprehensive reply, which I shall read carefully in Hansard. I beg leave to withdraw the amendment.
	Amendment 202 withdrawn.
	Clauses 240 to 246 agreed.
	Amendment 203 not moved.
	Amendment 203A
	 Moved by Lord Saatchi
	203A: After Clause 246, insert the following new Clause—
	"Audit of banks
	Audit of banks
	(1) The Treasury shall make provision by regulations requiring a bank's auditor to include a description in the notes to the bank's annual accounts of any significant sums which could become a liability for the bank and of the circumstances in which they could become a liability.
	(2) The regulations shall specify that the description should include sums invested in structured investment vehicles and sums for which the bank has achieved insurance."

Lord Saatchi: I am moving this amendment because the best form of bank regulation is full disclosure. This amendment concentrates on requiring a bank's auditors to provide explanation and commentary on contingent liabilities contained in the bank's off-balance-sheet investments. That is so important, because the record seems to show that this banking crisis was started by an acronym.
	At Second Reading, I offered noble Lords a real sentence that came from the banking world:
	"I use CFDs in my SIV to buy CDIs in the CDS".
	I encouraged your Lordships to ask your friends in the banking world what that meant. I have been doing that over Christmas, since Second Reading, and I have yet to meet a chairman, a chief executive or an owner of a bank who can translate that sentence into plain English. They know what those acronyms are, and what the letters stand for. They know that they exist, but cannot explain what they mean.
	The distinguished former Governor of the Bank of England, the noble Lord, Lord George, confirms the point. Writing about those banking acronyms in a recent pamphlet, he said that when they arose, while he was the governor, he did not understand,
	"how they were rated or related".
	Those acronyms brought the world to its knees, and hence this amendment. I do not want to detain the Committee at this hour, but on the audit of banks it is important to appreciate the startling creativity of how that all came about. Some people—wise people—said that the amendment was pointless because you could not legislate for creativity and that there would always be a way around whatever rules or regulations there were. I do not have such a low opinion of the law, so I am still confident of the amendment.
	I will try to edit what happened as best I can. We all know that there was a time when it was thought that banks should not lend more than they had on deposit. Then it was thought that that was very restrictive on banks and that they ought to be able to lend a multiple of what they had on deposit. It was unfair not to let them do that because not all the depositors would ever ask for their money at once. Then it was agreed that there could be a multiple, which became a ratio. That was going to be determined by a body called the Basel Committee, with which this Committee is familiar.
	The Basel Committee does not lay down rules. It is a committee of central banks, regulators and bankers, and has no authority and no power. It describes itself as a forum and makes what it calls recommendations. It made recommendations about what the capital ratios of banks should be—in other words, what the multiple of deposits should be.
	Here came the first startling piece of creativity on the part of the banks, which was deliberately concocted to get around the restrictions of the Basel Committee. It was to create what are called structured investment vehicles, which for some reason—and I still have never had an adequate explanation from any auditor—could be contained off balance sheet. Therefore, these became investments, not loans, and this was no longer a bank's loan book; it was a market in investments. It enabled the banks to do exactly what it intended, which was to lend more.
	As banks began to lend more, they began to lend more to classes of activity that brought them to a second restriction, which was the credit rating agencies, just referred to by my noble friend. Apparently, in this world it is not possible for certain institutions to buy or invest in anything other than what are called triple-A-rated securities. Sometimes they do not want to; sometimes they are not allowed to. Anyway, they reached the point where they had to overcome the problem that the credit rating agencies were refusing to give triple A ratings to some of these investments. They hit on another brilliant way around that; they created a new industry. They went to insurance companies which, up until then, had insured cars and houses against loss, and said that this was a new world in which they could insure securities—debts—which the insurance companies willingly did. The banks were then able to go back to the rating agencies and say, "There you are. These debts are now triple A because they are insured".
	Therefore, in two steps you have the makings of how so much debt and liabilities were contained off balance sheet in the accounts of giant banks. This is why when the crisis arose it was all such a shock and why it is still unravelling. Nobody knew—not even the Minister himself, not the Treasury, the FSA, the Bank of England, the US Federal Reserve, the US Treasury Secretary or the Chancellor of the Exchequer—and they still do not. I am assure that there are more write-offs and shock announcements on the way. To give the Committee an idea of the scale, Citigroup still has $1.2 trillion in off balance sheet special purposes entities. To underline the point, the Committee should consider what was said by a senior Government source on Friday about the liabilities of the banks. He said:
	"In short, we do not know what they are worth. All the assets on the balance sheet have got to be valued to the best of our ability. Auditors have been brought in to work this out".
	That statement, were it to apply to the grocery shop down the road in your local high street, would be sad but understandable. When it applies to the biggest banks in the world, it is truly astonishing. No wonder the former head of the Federal Reserve, Alan Greenspan, looked on as all these events unfolded with what he called "shocked disbelief". A request that banks routinely make to their customers—"Please show me your balance sheet"—was one with which the banks themselves could not promptly comply. This amendment places a duty on the auditors of the banks to ensure that this never happens again and that their clients can provide an answer in future.
	The Minister did not mention Basel II at Second Reading, yet the OECD said last week:
	"Basel II ... fostered the creation of off-balance sheet vehicles",
	which, as you have just heard, are at the epicentre of this financial crisis. What does this Bill say about such vehicles? Nothing. What does this Bill say about off balance sheet items? Nothing. What does this Bill say about bank liabilities which are supposedly insured? Nothing.
	I can predict the Minister's response to this amendment. I can virtually read his brief upside down. He will echo the words of Ben Bernanke, Chairman of the US Federal Reserve, who said last week that there is a need for increased surveillance and more oversight, particularly of capital regulations and accounting rules, on a global basis to detect and manage risk. Having said that, the Minister will reassure us that the International Accounting Standards Board has recently been charged by the Financial Stability Forum and the G20 leaders to review its relevant standards and, as a result, is proposing new consolidation rules. He will go on to say that, in addition, the Committee of European Banking Supervisors and the FSA are seeking greater disclosure following this financial crisis and that the BBA has supported this by offering their recommendations in advance of the 2008 half-year interims. He will then conclude that this area needs to be taken on an international basis rather than the UK alone and he will reassure us that good work is already under way. And we will all be touched by his romantic faith in the wisdom of bodies such as the IASB, the FSF, the G20, the CEBS, the FSA, et cetera. If your Lordships want, at nearly 2 am, to send a message to these bodies about the crucial importance of full disclosure, this amendment will do the trick. It is a wake-up call to the regulators, the bankers and especially their auditors. I beg to move.

Baroness Noakes: My noble friend has made his usual eloquent and amusing case. I agree with the main thrust of his amendment, which is that there needs to be better disclosure in the accounts of banks. I have one quibble with him, which is that it is headed "Audit of banks" and requires auditors to put things in the notes to the banks' accounts. There are many questions to be asked about the role of auditors in the financial crisis but I do not think one of the answers is to give them power to write things in the banks' annual reports. That is for the banks themselves. If this were headed "Accounts of banks", it would be a more straightforward amendment, but I completely support the thrust behind it.

Lord Oakeshott of Seagrove Bay: Today of all days I would have hoped that the noble Baroness, Lady Noakes, would declare an interest as a pensioner of an audit firm and taken a more robust view.

Baroness Noakes: I have no interest to declare as a former pensioner of a firm because I am not.

Lord Oakeshott of Seagrove Bay: We on these Benches support the noble Lord, Lord Saatchi. If I can dare to give him a slight lesson in negotiation, I do not think he should have pre-empted the Minister. He makes an extremely powerful case. The Sunday Times yesterday also made a powerful case about the questions and the potential conflicts of interests for auditors, who are taking large fees for auditing our banks as well as substantial fees for non-audit work. I think the example that they gave was that Barclays last year gave £25 million to PricewaterhouseCoopers for auditing and £19 million for non-audit fees. There are serious questions, as in America, as to whether major audit firms should do non-audit work for banks, particularly in the present climate.
	I remember during the passage of the Bill to nationalise Northern Rock that my amendment for an independent audit by the Bank of England was passed with Conservative support. Unfortunately, it was overruled in another place. PricewaterhouseCoopers were, again, the auditors there. Serious questions remain over their failure to get to the bottom of what was going on at Northern Rock and properly to alert the Financial Services Authority. We on these Benches believe that the amendments of the noble Lord, Lord Saatchi, are timely, significant and appropriate. If he chooses to press them to a vote at this late hour, we will support them. If he feels that he does not want to, I hope that the Minister will think carefully and consider what the noble Lord has said, and perhaps come back with a substantial response on Report.
	In the present climate, with the taxpayer at risk for literally trillions of pounds, these are important and timely amendments. I hope that the Minister will take them seriously.

Baroness Anelay of St Johns: It is perhaps appropriate that I thank the Minister at this stage, after what has been an extraordinary time—and we have an extraordinary time to go on the Bill yet—for his courtesy throughout the debate. It has been noticeable that my noble friend Lord Saatchi has maintained that courtesy, as have my noble friends.
	I was glad that my noble friend Lady Noakes was able to intervene so rapidly to respond to an unjustified attack by the noble Lord, Lord Oakeshott. It is difficult for me to find the words, because I was appalled at the manner in which he addressed his opening remarks about a declaration of interest. It is not something that I thought would happen. Of course, it is our normal custom to ascertain accuracy before one makes allegations against a Member of this House. It is not something that I take lightly.

Lord Oakeshott of Seagrove Bay: I am happy to correct any impression that I gave. I thought about it as we were talking about auditors and I knew that the noble Baroness had been a partner. I am happy to withdraw anything. I thought that we ought to be particularly careful to declare any potential interests. I did not intend in any way to impugn the honour of the noble Baroness, Lady Noakes, and I apologise.

Lord Myners: I listen with great interest to anything that the noble Lord, Lord Saatchi, says about banking. I remember that, in the late 1980s, his advertising agency Saatchi & Saatchi was reported to be considering the acquisition of Midland Bank. Whether those reports were true or not, perhaps the noble Lord will advise the Committee. He was certainly timely in spotting the opportunity for creative writing and creative skills in anticipation of new opportunities arising in the emerging and acronymic world of banking.
	The noble Lord's amendment would ensure that bank financial statements include full and proper disclosure of bank liabilities, so that shareholders, regulators and policymakers can understand the position and discharge their respective duties. I entirely agree with this purpose. Unfortunately, the amendment is not the most effective way of achieving this purpose. Indeed, I suspect that it would have damaging effects.
	First, imposing this obligation on the auditor would confuse the clear, long-standing and appropriate relationship between companies and auditors. Directors must prepare accounts in accordance with detailed accounting standards and are legally responsible for their content, truth and fairness. That is the point the noble Baroness, Lady Noakes, was making. Auditors then examine their accounts and provide a separate opinion for shareholders on their truth and fairness. The amendment would reduce the clarity as regards who is responsible for disclosures and who for examining them.
	Secondly, this obligation would effectively duplicate existing requirements. Banks are required to fully disclose their liabilities in accordance with the relevant standards if the auditor believes disclosure of liabilities or any item is inadequate or misleading. It must provide an emphasis of matter if inadequate or qualification if misleading in its audit report. I hope the noble Lord will agree that the critical issue is to ensure that the accounting standards governing bank disclosures and their application and audit is sufficiently rigorous to ensure full disclosure of off-balance-sheet liabilities, credit insurance exposure and all liabilities.
	Let us consider the adequacy and application of accounting standards in these circumstances. Certain financial liabilities such as structured investment vehicles can, in some circumstances, be removed from company balance sheets. This is generally permitted when companies no longer have any responsibility for the liability; for example, if the liability has been taken on by another entity. Even if the liability must no longer be consolidated into the accounts, standards require disclosure of the liability in notes to the accounts. If the liability becomes due and the separate entity is unlikely to be able to meet it, the liability may then revert to the original company. It should rightly then be put back on the face of the company's balance sheet, as opposed to being referred to in a note.
	These decisions, such as the decision to reinstate off-balance-sheet liabilities, require judgments based on probabilities. For example, how likely is it that the liability will have to be paid, or that the separate entity will be able to pay it? It is appropriate that these judgments should be made in the first instance by company directors who surely should be the most knowledgeable about the assets they have placed on the balance sheet. It is equally appropriate that those judgments should then be reviewed and reported upon by the auditors. That is the essential check and balance. The criteria for making these judgments and the detail of the consequential disclosures are set down in international financial reporting standards.
	As this point, I believe the noble Lord, Lord Saatchi, was correct in summarising what I would have said. At this late hour, I am cognisant of the fact that he may well have introduced the House to an entirely new form of debate in which a Member not only speaks to an issue but also provides his own response, thereby eliminating the entire need for the other side of the House. I will reflect on this when I finally place my head upon my pillow later this morning.
	The noble Lord, Lord Oakeshott—duly chastised, but with his apology correctly made—indicated that if pushed to a vote he would support this amendment. I urge the noble Lord, Lord Saatchi, to reflect on some of the things I said which he did not anticipate. Like a great copywriter he covered most of the content, but missed one or two bits. The most critical is this balance between the responsibility of the directors for the content and the auditors for independent verification. I hope he will reflect on that and come back on Report if he is still not persuaded. I would be happy to engage with him on this subject outside the Chamber. In those circumstances, I hope he might be persuaded this morning to withdraw his amendment.

Lord Saatchi: I am so persuaded. The only point that I wish to make to the Minister is that, if he were a lecturer at Harvard Business School and he described, as he did, the balance of responsibilities of companies' directors and the auditors' reviewing duty, everyone would have been very impressed and would have thought that it was a very sensible system. There is only one slight flaw, in that that was the system in place when this complete world calamity occurred, the basis of which was the production of incorrect accounts by the banks. Therefore, it does not quite work in the way that he described.
	I hope that between now and Report he will reflect on what can be done to give the public at large, the media, and Members of this Committee and your Lordships' House more confidence that the information provided by banks is truly timely and accurate, because that certainly has not been the case in the past six months.
	Amendment 203A withdrawn.
	Amendment 203B
	 Moved by Lord Hoyle
	203B: After Clause 246, insert the following new Clause—
	"Banking in post offices
	(1) The Secretary of State shall, by regulation, establish a scheme to ensure that banking facilities are available in both directly managed post offices and sub-post offices throughout the United Kingdom.
	(2) Regulations made by the Secretary of State under this section are—
	(a) to be made by statutory instrument, and
	(b) subject to annulment in pursuance of a resolution of either House of Parliament."

Lord Hoyle: This is a probing amendment but, in the light of some of the remarks about private banking that the Minister made in the Times on Saturday, perhaps it will receive the support that I had hoped for. My only disappointment is that we are debating what I consider to be a very important amendment so early in the morning, but I shall be as quick as I can in speaking to it.
	The Government have been talking about a universal bank for the Post Office since 2000, and it is time that the talking stopped and the action began—it is time to decide. The case for it is fairly straightforward. There are 12,000 branches nationwide, and it would bring banking to deprived areas and bring in those who are currently financially excluded. At the same time, now that the Post Office card account has been awarded, we could change it from an account from which people can only withdraw money that has been deposited by the Government. Indeed, we could turn it into a real, fully functional card, and that would be of advantage for people who are deprived or excluded and have to pay more. However, of course we would have to prevent them going into debt.
	The benefit to those in rural areas is self-explanatory. Banking facilities would be brought to rural areas, where the nearest bank is probably miles away. It would certainly be an advantage to the elderly, to people with disabilities, to mothers with children and to those without cars. I shall not go into that too much as it is self-explanatory. A lot of small and medium-sized businesses would also benefit. They rely on the Post Office and it would be a great advantage to them. This proposal is long overdue.
	The question of what type of bank it should be is a different matter. I was speaking to the National Federation of Sub-Postmasters, whose members would like a return of the National Savings Bank. It was in existence for about 108 years—I think that it was abandoned in 1969—and the federation feels that it would be a suitable vehicle. Others take the view that Girobank, which was highly successful, should be brought back. Unfortunately, it was privatised by a previous Government, and I thought that that was a mistake. That is another way in which this issue could be dealt with. From my own point of view, I think that consideration should be given to the new Britannia/Co-op merger. It is mutual and ethically responsible, and I think that it would fit well into the banking service. That is just a thought .
	Let me say finally that people like to go to the Post Office. They feel comfortable there. Many people who would not go near a bank go to a post office. Having made this plea, I hope that we shall not have to bring it back at Report, but I shall listen carefully to my noble friend's reply. I beg to move.

Lord Clarke of Hampstead: It has been worth all the hours of waiting to be able to take part in this debate and support the amendment. I say that it has been worth the wait because the first wait for a National Girobank took 40 years. My organisation—in which I declare an interest, and which was for Post Office workers at the time—agitated and argued for what became the people's bank, the National Girobank. So a few hours out of a January evening is not very much when we think of what is at stake.
	My noble friend Lord Hoyle has just mentioned the Girobank. The question of a people's bank, or a publicly owned bank which could operate within our Post Office organisation, has already been answered. The proposition is feasible. It was tried, tested and found to work successfully when the National Girobank was created in 1968—and then almost given away in 1990 because of political dogma. I have no problem with political dogma. The then Conservative Government wanted to sell it, so they sold it. They did not like it but they did it. I would argue that now that we have a Labour Government, the Government should resurrect it.
	Just before Christmas I asked the Minister whether he thought that,
	"the highly popular, efficient and straightforward banking service provided by the Post Office through the National Girobank was a very successful operation".
	I said:
	"It was a tragedy when it was ... sold off ... for £118 million. At that time thousands of people were waiting to open accounts at National Giro".
	The Minister said that he would give the matter further consideration, and I asked whether he would consider reintroducing it. He said:
	"I take note of what my noble friend has said. In the first instance I am going to convene a group of government departments to identify the potential additional work that the Post Office may do. There are opportunities there and we want to examine them closely".—[Official Report, 13/11/08; cols. 789-790.]
	It is late but I am pleased that I have stayed to hear this amendment being moved. I have no doubt that there will be other occasions when we can tell the whole sorry story of the sale of Girobank at a knock-down price. For tonight, or this morning, I simply ask my noble friend to agree to look at the possibility of resurrecting what was a reliable, efficient and growing bank at the time that it was effectively destroyed. It served ordinary folk then and it could do so again. It will not take long, as the evidence is there. I commend the article that appeared in the Scotsman soon after the sale took place. I was concerned that no other newspaper in this country carried the story. The accuracy of the financial shenanigans surrounding the sale of Girobank needs to be looked at. If I win the lottery I will get a student to write a thesis—I do not have the time. As I said, there will probably be other times when the story can be told, but for this evening I shall simply support the amendment.

Lord Oakeshott of Seagrove Bay: We on these Benches support the amendment as well. I pay tribute to the noble Lord, Lord Clarke of Hampstead, who as a former postman knows what he is talking about. We are very concerned about the present banking arrangements of the Post Office, specifically its arrangement with the Bank of Ireland.
	A few weeks ago I warned in this Chamber about the very shaky state of the Irish banks. I particularly had in mind Anglo Irish Bank, which I knew from my experience in the property market had been involved in some utterly wild lending in this country. Since then Anglo Irish Bank has had to be nationalised, and it was also discovered that its chief executive had his hand in the till—I think it is fair to say it that way—for more than £100 million. I warn noble Lords that the other two Irish banks and the Bank of Ireland, which is the partner for the Post Office and its banking services, are also in a very grave state.
	Not many people who have deposits in the Post Office know that they are not covered by the Financial Services Compensation Scheme in this country. They are relying entirely on a guarantee from the Irish Government which runs out at the end of September 2010. We saw the risk of relying on guarantees from small foreign countries in the case of Iceland, and I have serious concerns about the position of Ireland.
	In these very troubled times it is not appropriate for British depositors who have their money in the Post Office to rely—though many do not know it, as it is not made clear on the website—on an Irish Government guarantee. I reiterate the warning that I gave a few weeks ago. I ask the Minister and the noble Lord, Lord Mandelson, to face up to this problem and to make sure that we now get a stronger and more stable long-term partner for the British Post Office in its banking operations. The suggestion was made from the Benches opposite that a mutual such as the new Britannia/Co-operative, the Nationwide Building Society or one of the substantial, now mainly nationalised, British banks would be appropriate. Things are now too serious for depositors in the British Post Office to be relying, perhaps without being aware of it, on a guarantee from a small and shaky country. That is the real message of this amendment, and we should deal with it rapidly. If noble Lords press this amendment now or on Report, we would support it.

Lord Davies of Oldham: I am grateful to my noble friend Lord Hoyle for raising this important topic, albeit somewhat later than he would have hoped. I am also grateful to my noble friend Lord Clarke, who we all recognise to be a great authority on these issues and zealous on all occasions when he can put the case forward, as he did at this late hour.
	I want to be as positive as I can in response because I recognise the value of several of the points made by my noble friends. Let us not underestimate the role that the Post Office plays at present in providing banking facilities. Banking facilities from all the major banks are already available in post offices. The most recent FSA guide to basic bank accounts, published in autumn 2008, lists 17 providers whose basic bank accounts can be accessed at the Post Office. In addition, current accounts from Alliance & Leicester, Bank of Scotland, Barclays, Clydesdale Bank, Halifax, Nationwide, Lloyds TSB, Northern Bank and the Co-operative Bank are all accessible at the Post Office. Moreover, the Post Office provides a range of its own services, including its own-brand banking services.
	The noble Lord, Lord Oakeshott, said that he has no faith in any of the banks in Ireland or in the Irish Government guarantee. He may be justified in his warning, or he may, unlike Cassandra, be warning a great deal without validity. That is an issue for judgment. The Post Office has its own-brand banking services backed up by the Bank of Ireland, and depositors receive a guarantee of £100,000 backed by the Irish Government. The noble Lord, Lord Oakeshott, may have the confidence to say that that should be set at nought, but that is not the view of the British Government.

Lord Oakeshott of Seagrove Bay: The Minister may recall that he was very dismissive of my warnings about Iceland. Can he confirm for the record that there is no British guarantee of any kind for deposits with the Bank of Ireland through the Post Office, and depositors are totally relying on an Irish Government guarantee? Can he just put that on the record, please?

Lord Davies of Oldham: I was not seeking to strike it from the record. Of course that is true: the noble Lord is right. I was indicating that the British Government do not share his opinion that the guarantee of the Government of Ireland is worthless.

Lord Oakeshott of Seagrove Bay: I was suggesting that the guarantee is not nearly as good as one from a British Government or bank.

Lord Davies of Oldham: The noble Lord did not introduce that comparison, but of course I accept it. In any circumstances where one compares the support of the Government of one of the greatest economies in the world with that of a Government that represents one of the smaller economies of Europe, there is no comparison in terms of the resources that can be made available. The issue is the guarantee, and the British Government do not share the view of the noble Lord that there is an inherent insecurity because the Bank of Ireland's work for the Post Office is backed by the Irish Government. I do not accept that.
	I will now be more constructive and move on from this arid debate with the noble Lord about the value of the guarantee. It was recently announced by a British Minister, the Secretary of State for Work and Pensions, my right honourable friend James Purnell, that the Post Office will retain the contract to deliver the Post Office card account, a simple and effective facility for people to receive benefit payments. There is no evidence to suggest that present commercial arrangements for access to banking facilities through Post Office branches is inadequate. There appears to be no need for a statutory requirement to provide a service that is already available.
	My noble friends talk about the potential of the Post Office. I agree that there is potential. However, more importantly, I want to quote a reference. The Government have asked the Select Committee on Business, Enterprise and Regulatory Reform to investigate what scope there may be for the Post Office to expand the services that it offers. As part of its investigation, the Select Committee will look at how the Post Office can expand its financial services. Constructive work is being done, and I appreciate the contributions of both my noble friends in seeking to emphasise that the Post Office may have greater potential than is being exploited at present.
	My noble friend Lord Hoyle said that he will almost certainly raise the issue on Report if he does not get a satisfactory reply now. I imagine that a satisfactory reply would be to endorse every conceivable constructive suggestion that he has put forward, together with those that my noble friend Lord Clarke added to the list. I cannot quite do that, but I hope that my noble friends will recognise that the Government are already constructively engaged in extending the financial services of the Post Office to a much greater extent than many recognise. On that basis, I hope that my noble friend will withdraw the amendment this evening—if it is still this evening.

Lord Hoyle: It is this morning, in fact. My noble friend, as always, was trying to be very helpful. We are asking for an extension of the full range of financial services through a public bank, so it is probable that we shall return to this on Report. In the mean time, I beg leave to withdraw the amendment.
	Amendment 203B withdrawn.
	Amendment 204
	 Moved by Baroness Noakes
	204: Before Clause 247, insert the following new Clause—
	"Review of Act
	(1) The Treasury shall appoint an independent person to conduct a review of the operation of this Act no later than 3 years after it comes into effect.
	(2) The review is not to be concerned with the general policy to which the Act gives effect.
	(3) The person conducting the review must seek the views of all persons who appear to him to have relevant knowledge of the workings or effect of the Act.
	(4) On completion of the review, the person conducting it must make a written report to the Treasury—
	(a) setting out the result of the review, and
	(b) making such recommendations (if any) as he considers appropriate.
	(5) The written report must be received by the Treasury no later than 4 years after the Act comes into effect.
	(6) A copy of the report must be—
	(a) laid before each House of Parliament, and
	(b) published in such manner as the Treasury consider appropriate.
	(7) "Independent" means appearing to the Treasury to be independent of the relevant authorities as defined in section 4(3) of this Act."

Baroness Noakes: Amendment 204 places a requirement on the Treasury to arrange an independent review of the workings of the Act three years after Royal Assent. When we reach the amendment about the review of the Act, we always know that we are on the final lap.
	We have discussed what reporting requirements are or are not in this Bill at several points in Committee. Our call has generally been for more transparency and our calls have generally fallen on stony ground.
	Perhaps I may remind the Committee that there are several types of concern about how this Bill will operate in practice. First, there are some very sweeping powers allowing the tripartite authorities to act when they believe that financial stability is at risk. If those powers are used—we probably all hope that they will not have to be used—it is right that how they have been used will be examined, together with the outcomes, whether they are positive or negative.
	Secondly, there are concerns about the impact of some of these provisions in terms of how they will affect the financial services sector in the UK. The partial transfer provisions and their impact on legal certainty have stirred up much unhappiness. If either or both of the terms of Clause 48 or the provisions of the related statutory instrument are not satisfactory, there could be adverse arrangements on netting, set-off and similar arrangements. We know that the Government do not want that to happen but there is not yet agreement on all sides about the way forward. The BBA, for example, is keen for a review of this area after the Act has been passed.
	Thirdly, the Government are keen on the breathtaking powers in Clause 75 to rewrite other legislation even on a retrospective basis and with virtually no parliamentary scrutiny. In other places, the Bill will be practicable only if significant secondary legislation is passed. There are other very wide powers and how those powers will be used is largely an open question.
	My amendment is loosely based on the provisions of Section 14 of the Financial Services and Markets Act, which allows the Treasury to set up an independent review of the FSA's value for money. I am sure that value for money was one of the prime concerns when that Act was going through. That is not the issue for this Act. Our concerns are much more about the impact of the Act on the financial services sector and whether it has been effective. I have suggested having a review after three years. There is never a right time, but three years should be enough time to reveal the kind of consequences that might arise, for example, if legal certainty on netting and set-off were not achieved. The major secondary legislation should have been made.
	My amendment requires a review by an independent person. I think that there is justifiable scepticism about internal reviews. The position of the Treasury within the tripartite authorities means that it is parti pris for this purpose. A credible independent review will inform the Government and Parliament about the quality of the provisions in the Bill and whether it remains fit for purpose. It will also contribute to the wider public confidence in financial services. Because of that, I am confident that the Minister will welcome my amendment. I beg to move.

Lord Newby: I should like to comment on Amendment 204. In order to save time, I shall also speak briefly to our Amendment 208, which would have the same effect. The noble Baroness has laid out a number of reasons why the Bill in certain respects raises as many questions as it answers. It contains sweeping powers. We have talked about a number of those today. We talked, for example, about the powers in Clause 225, and other clauses also introduce sweeping powers, which, had we not been operating in haste and in the middle of a financial blizzard, would almost certainly not have got into legislation in their current form.
	My concern about the noble Baroness's amendment is simply that you can have an independent person doing a review, but having people doing reviews, as we have seen with jolly old Equitable Life, does not necessarily mean that any action flows from them, however damning they are about the way that something is operated. Amendment 208 puts a stronger requirement on the Government because it requires them not only in effect to have a review but to justify the Act, as it will be, in its entirety after a three-year period. Parliament would then have a cast-iron opportunity, just as we have now, to debate the issues because the Banking (Special Provisions) Act had a life of only a year. It will give Parliament an opportunity to discuss the many and various issues about which we have ongoing concerns and which the noble Baroness raised.
	As I said, my concern with her amendment is that, in a sense, it is too weak to ensure that Parliament has a chance to examine all these items in great detail. I realise that ours is a nuclear weapon of an amendment in comparison but I would rather that the balance was on that side than the other.

Lord Davies of Oldham: As she is fond of doing, the noble Baroness began with a sporting metaphor. Earlier she provoked my noble friend to produce a tip for a horse that was running today which came second at 40-1. That shows the virtues of these debates provided people act upon what the Government says. I objected to her sporting metaphor because it is all right the noble Baroness saying that she is glad that we have reached the last lap, but the last lap of a marathon is 385 yards and there are 26 miles before it. I feel today that we have been through that experience and I hope the last 385 yards will not take too long.
	On the key points of the proposals in Amendment 204, mechanisms are in place to ensure that the arrangements can be reviewed and refined as we go forward. Most notably, the banking liaison panel will have an important role in advising the Treasury in due course on what changes are needed to legislation. The panel's remit allows it to give advice on the secondary legislation made under Parts 1 to 3 of the Bill and it will be able to keep under review aspects of the special resolution regime, which is a very important part of the Bill, including the partial transfer safeguards and the detail of the operation of the new insolvency procedures established under Parts 2 and 3 of the Bill.
	An ongoing process of review is surely far more appropriate than a one-off review. The tripartite authorities are bound to be fully accountable to the public, the courts and, where appropriate, to Parliament for their actions. Therefore, each time the special resolution regime tools are used there will be a process of consideration and review.
	This said, I agree with the principle adumbrated by the noble Baroness in her proposed new clause. While we have mechanisms in place to review elements of the scheme, good governance and our better regulation principles demand that the legislation as a whole is reviewed at an appropriate time. It is therefore, of course, our intention to return to these arrangements and ensure that all elements of the scheme are appropriately covered by a review. I commit the Government to this position and I hope the noble Baroness will feel that that commitment is an earnest of our intent and meets the broad position put forward in her amendment.
	The noble Lord, Lord Newby, said that he had produced a nuclear weapon. It leaves the noble Baroness's approach looking relatively mild if I have to tackle the nuclear weapon of a sunset clause. As I recall from past occasions when tests used to take place at various atolls, the atomic bomb produces a rare form of sunset.
	The noble Lord will appreciate that we have, as I have just indicated, appropriate mechanisms in place to ensure that the arrangements can be regularly reviewed and refined. I, therefore, hope that he considers that the sunset clause is not necessary. We have had a fairly substantial debate on this on two occasions, thanks to the initiative of the noble Lord, Lord Saatchi, on the necessity for a fundamental approach to these issues. He may not altogether agree with the Bill, but he has taken the trouble to contribute this evening because, as he will concede, the Bill has a long-term perspective on banking legislation. It is meant to set the basis for effective control of the banking system against the background of the difficulties of the past 18 months or more. We are not out of difficulty yet and, therefore, this is substantial legislation with a long-term perspective.
	We had a limited time on the Banking (Special Provisions) Act, which lasted for a year. We all recognised then that we were acting in emergency circumstances relating to localised difficulties rather than the total position. This Bill is not about a partial, small-time solution: it is a fundamental reform of banking and the structure that we need for the future. I hope that the noble Lord, Lord Newby, will accept that a sunset clause, albeit slightly longer than one year, is more appropriate for legislation that has a shorter perspective than this Bill. Therefore, I hope that he will see that the processes that we have in place for review, answerability and accountability, which run right through the Bill, are an assurance and that he does not need to press his amendment. I hope that the noble Baroness recognises that I have accepted her principles and have interpreted them in a marginally different way, so that she is able to withdraw her amendment.

Baroness Noakes: I thank the noble Lord, Lord Newby, for taking part in the debate and for grouping his Amendment 208 with Amendment 204. He described his amendment as the nuclear option, which it is. That is why we find so much difficulty with it. It seems to us that much in the Bill should be on the statute book in order to deal with the possibility of financial instability problems arising again; for example, the bridge bank provisions should be there permanently and should be a matter of detail and not fundamental provision. We do not feel that a nuclear option is right for a Bill as complex as this one; it contains so many necessary provisions. As I pointed out when I spoke to my amendment, we think that a number of areas will need to be revisited or reviewed after enactment.
	The noble Lord, Lord Davies, referred to the Banking Liaison Panel's role—an ongoing situation. On a number of occasions, the Ministers, like me, have pointed out that the wording of the Bill does not quite say that. I have already said that I will return to the matter. Clearly, that is helpful.
	The Minister said that an ongoing processes of review is better than a one-off processes. I do not think that one is better than the other; they tend to be different elements of review. A one-off review tends to lead to a specific set of actions rather than an accumulation of points that have arisen. The Minister said that the Government would undertake review. The issue is whether that should be in the Bill. I am sure that the Government will review, but in their own time and in a way that they want. The purpose of my amendment is to put some structure and timing around that so that it is not left entirely to the Government of the day. I shall consider what the Minister has said before Report.
	Before I withdraw my amendment, I have decided that we will not move Amendment 205, as my noble friend Lord James is unable to be with us, or Amendments 206 and 207. We will save those for another day. In view of the lateness of the hour, the noble Lord, Lord Newby, has indicated that he will not now be moving Amendment 208. That brings us to the conclusion of the Committee stage. I place on record the appreciation of these Benches for the staff of the House, and to Hansard, who have had to labour alongside us in circumstances which are clearly quite exceptional and difficult. For all of our differences, I think we have had a constructive Committee.

Lord Davies of Oldham: I second the noble Baroness's vote of thanks to all those who have served the Committee so well through its proceedings. I pay tribute, of course, to the noble Baroness. All in the House will recognise that she has borne the majority of the heat and burden of every day on this Bill. We respect the work that she has done; I only wish she was slightly more appreciative of the Government's responses on occasion. We look forward to Report.

Lord Newby: I join other noble Lords in expressing our appreciation to the staff of the House for putting up with the way that we sometimes do business here. I confirm that I do not intend to press Amendment 208 to a vote.

Baroness Noakes: I beg leave to withdraw the amendment.
	Amendment 204 withdrawn.
	Clause 247: "Financial assistance"
	Amendments 205 and 206 not moved.
	Clause 247 agreed.
	Clause 248 agreed.
	Clause 249: Statutory instruments
	Amendment 207 not moved.
	Clause 249 agreed.
	Clauses 250 to 253 agreed.
	Amendment 208 not moved.
	Clauses 254 and 255 agreed.
	Amendment 209 not moved
	House resumed.
	Bill reported with amendments.

House adjourned at 2.09 am.